MBA 701 Midterm Exam (Remotely Proctored) |
Questions and Answers | 2026 Update | 100% Correct
- LSUS.
1. A project has a negative NPV but an IRR greater than the cost of capital. Which of the
following could explain this paradox?
A. The project has non-normal cash flows with multiple sign changes.
B. The project's payback period is less than its life.
C. The cost of capital is less than the IRR.
D. The project has a profitability index greater than 1.
Answer: A
Rationale: Conflicting NPV and IRR signals typically occur when cash flows change sign
multiple times, leading to multiple IRRs. Payback period is irrelevant. If IRR > cost of capital,
NPV should be positive unless there are multiple IRRs.
2. In which of the following industries is the threat of substitutes likely to be highest?
A. A commodity industry with undifferentiated products.
B. An industry with high switching costs for customers.
C. An industry protected by patents.
D. An industry with few close substitutes.
Answer: A
Rationale: Commodities are easily replaced by alternatives; low differentiation increases
substitution threat. High switching costs and patents reduce threat.
3. A firm notices that a 10% price increase leads to a 15% drop in quantity demanded. The
marginal cost is $50 and current price is $100. To maximize profit, the firm should:
A. Increase price.
B. Decrease price.
C. Keep price unchanged.
D. Need more information.
Answer: A
Rationale: Price elasticity of demand = -15/10 = -1.5. Optimal price = MC * (|e|/(|e|-1)) = 50 *
(1.5/0.5) = $150. Since current price ($100) is below optimal, the firm should increase price.
Page 1
,4. According to Herzberg's two-factor theory, which of the following is most likely to be a
hygiene factor?
A. Recognition for achievement.
B. Opportunities for growth.
C. Company policies.
D. Challenging work.
Answer: C
Rationale: Hygiene factors include company policies, supervision, working conditions, and
salary. Motivators include recognition, growth, and challenging work.
5. In a repeated prisoner's dilemma, the condition for a 'tit-for-tat' strategy to sustain
cooperation is that:
A. The discount factor is sufficiently high.
B. The game is played only once.
C. Players have dominant strategies.
D. The payoff from defecting is zero.
Answer: A
Rationale: In infinitely repeated games, cooperation can be sustained if players value future
payoffs enough (high discount factor). Tit-for-tat rewards cooperation and punishes defection.
6. The concept of 'agency theory' primarily addresses the conflict between:
A. Shareholders and employees.
B. Managers and debtholders.
C. Shareholders and managers.
D. Customers and suppliers.
Answer: C
Rationale: Agency theory deals with separation of ownership and control; managers may act in
self-interest rather than shareholder interests.
7. A brand extension that fails due to a lack of 'fit' is most likely because:
A. The brand's perceived quality is too low.
B. There is no similarity between the parent brand and the extension category.
C. The brand is too well-known.
D. The extension is priced too low.
Answer: B
Rationale: Brand extension success depends on perceived fit between parent brand associations
and new category. Lack of fit leads to dilution or failure.
Page 2
, 8. A pharmaceutical firm holds a patent for a blockbuster drug and faces no close
substitutes. Bargaining power of buyers is low due to insurance coverage, but suppliers of
rare raw materials have significant leverage. Which of Porter's five forces is most
threatening to the firm's long-term profitability?
A. Threat of new entrants
B. Bargaining power of buyers
C. Bargaining power of suppliers
D. Intensity of rivalry
Answer: C
Rationale: Suppliers of rare raw materials have high bargaining power due to limited
alternatives, which can squeeze margins. Patent protection reduces threat of entry, buyer power
is low, and rivalry is absent because of patent monopoly. Thus, supplier power is the most
threatening force.
9. A sales team has three performance levels: below quota, meet quota, exceed quota. Based
on expectancy theory, if an employee values the reward for exceeding quota (valence=0.9)
but believes effort has only a 0.3 chance of leading to that level (expectancy), and that
exceeding quota leads to the reward with certainty (instrumentality=1.0), what is the
motivational force?
A. 0.27
B. 0.9
C. 0.3
D. 0.03
Answer: A
Rationale: Motivational force = Expectancy × Instrumentality × Valence = 0.3 × 1.0 × 0.9 = 0.27.
Options 0.9 and 0.3 omit terms; 0.03 incorrectly multiplies all three as 0.3×1.0×0.1.
10. A software company sells a one-year license with a perpetual right to use the current
version, plus optional future upgrades. Under ASC 606 (IFRS 15), how should the
standalone selling prices be allocated if the license and upgrades are distinct performance
obligations?
A. Allocate entirely to the license because upgrades are ancillary
B. Allocate proportionally based on observable standalone selling prices
C. Defer revenue from upgrades until the upgrade is actually delivered
D. Recognize license revenue at point-in-time and upgrades over time
Answer: B
Rationale: ASC 606 requires allocation of transaction price to distinct performance obligations
based on relative standalone selling prices. Option A ignores distinct obligations; C and D
confuse timing with allocation. Proportional allocation is required even if prices are estimated.
Page 3
Questions and Answers | 2026 Update | 100% Correct
- LSUS.
1. A project has a negative NPV but an IRR greater than the cost of capital. Which of the
following could explain this paradox?
A. The project has non-normal cash flows with multiple sign changes.
B. The project's payback period is less than its life.
C. The cost of capital is less than the IRR.
D. The project has a profitability index greater than 1.
Answer: A
Rationale: Conflicting NPV and IRR signals typically occur when cash flows change sign
multiple times, leading to multiple IRRs. Payback period is irrelevant. If IRR > cost of capital,
NPV should be positive unless there are multiple IRRs.
2. In which of the following industries is the threat of substitutes likely to be highest?
A. A commodity industry with undifferentiated products.
B. An industry with high switching costs for customers.
C. An industry protected by patents.
D. An industry with few close substitutes.
Answer: A
Rationale: Commodities are easily replaced by alternatives; low differentiation increases
substitution threat. High switching costs and patents reduce threat.
3. A firm notices that a 10% price increase leads to a 15% drop in quantity demanded. The
marginal cost is $50 and current price is $100. To maximize profit, the firm should:
A. Increase price.
B. Decrease price.
C. Keep price unchanged.
D. Need more information.
Answer: A
Rationale: Price elasticity of demand = -15/10 = -1.5. Optimal price = MC * (|e|/(|e|-1)) = 50 *
(1.5/0.5) = $150. Since current price ($100) is below optimal, the firm should increase price.
Page 1
,4. According to Herzberg's two-factor theory, which of the following is most likely to be a
hygiene factor?
A. Recognition for achievement.
B. Opportunities for growth.
C. Company policies.
D. Challenging work.
Answer: C
Rationale: Hygiene factors include company policies, supervision, working conditions, and
salary. Motivators include recognition, growth, and challenging work.
5. In a repeated prisoner's dilemma, the condition for a 'tit-for-tat' strategy to sustain
cooperation is that:
A. The discount factor is sufficiently high.
B. The game is played only once.
C. Players have dominant strategies.
D. The payoff from defecting is zero.
Answer: A
Rationale: In infinitely repeated games, cooperation can be sustained if players value future
payoffs enough (high discount factor). Tit-for-tat rewards cooperation and punishes defection.
6. The concept of 'agency theory' primarily addresses the conflict between:
A. Shareholders and employees.
B. Managers and debtholders.
C. Shareholders and managers.
D. Customers and suppliers.
Answer: C
Rationale: Agency theory deals with separation of ownership and control; managers may act in
self-interest rather than shareholder interests.
7. A brand extension that fails due to a lack of 'fit' is most likely because:
A. The brand's perceived quality is too low.
B. There is no similarity between the parent brand and the extension category.
C. The brand is too well-known.
D. The extension is priced too low.
Answer: B
Rationale: Brand extension success depends on perceived fit between parent brand associations
and new category. Lack of fit leads to dilution or failure.
Page 2
, 8. A pharmaceutical firm holds a patent for a blockbuster drug and faces no close
substitutes. Bargaining power of buyers is low due to insurance coverage, but suppliers of
rare raw materials have significant leverage. Which of Porter's five forces is most
threatening to the firm's long-term profitability?
A. Threat of new entrants
B. Bargaining power of buyers
C. Bargaining power of suppliers
D. Intensity of rivalry
Answer: C
Rationale: Suppliers of rare raw materials have high bargaining power due to limited
alternatives, which can squeeze margins. Patent protection reduces threat of entry, buyer power
is low, and rivalry is absent because of patent monopoly. Thus, supplier power is the most
threatening force.
9. A sales team has three performance levels: below quota, meet quota, exceed quota. Based
on expectancy theory, if an employee values the reward for exceeding quota (valence=0.9)
but believes effort has only a 0.3 chance of leading to that level (expectancy), and that
exceeding quota leads to the reward with certainty (instrumentality=1.0), what is the
motivational force?
A. 0.27
B. 0.9
C. 0.3
D. 0.03
Answer: A
Rationale: Motivational force = Expectancy × Instrumentality × Valence = 0.3 × 1.0 × 0.9 = 0.27.
Options 0.9 and 0.3 omit terms; 0.03 incorrectly multiplies all three as 0.3×1.0×0.1.
10. A software company sells a one-year license with a perpetual right to use the current
version, plus optional future upgrades. Under ASC 606 (IFRS 15), how should the
standalone selling prices be allocated if the license and upgrades are distinct performance
obligations?
A. Allocate entirely to the license because upgrades are ancillary
B. Allocate proportionally based on observable standalone selling prices
C. Defer revenue from upgrades until the upgrade is actually delivered
D. Recognize license revenue at point-in-time and upgrades over time
Answer: B
Rationale: ASC 606 requires allocation of transaction price to distinct performance obligations
based on relative standalone selling prices. Option A ignores distinct obligations; C and D
confuse timing with allocation. Proportional allocation is required even if prices are estimated.
Page 3
