Solutions for Corporate Finance, 6th
Edition by Jonathan Berk
Final Exam Practice Question Bank
150 Practice Questions with Answers & Rationales
This document has questions covering core corporate finance topics (time value of money, bond valuation, stock
valuation, capital budgeting/NPV/IRR, risk & return/portfolio theory, CAPM & cost of capital, capital
structure/leverage, dividend policy, working capital management, financial statement analysis, options/derivatives
basics, mergers & acquisitions, efficient markets/behavioral finance/governance, international finance, and free cash
flow/project analysis).
Contents
1.Time Value of Money (Questions 1–10)
2Bond Valuation (Questions 11–20)
3.Stock Valuation (Questions 21–30)
4.Capital Budgeting: NPV, IRR & Payback (Questions 31–40)
5.Risk, Return & Portfolio Theory (Questions 41–50)
6.CAPM & Cost of Capital (Questions 51–60)
7.Capital Structure & Leverage (Questions 61–70)
8.Dividend Policy & Payout Decisions (Questions 71–80)
9.Working Capital Management (Questions 81–90)
10.Financial Statement Analysis & Ratios (Questions 91–100)
11.Options, Derivatives & Risk Management Basics (Questions 101–110)
12.Mergers, Acquisitions & Corporate Restructuring (Questions 111–120)
13.Efficient Markets, Behavioral Finance & Corporate Governance (Questions 121–130)
14.International Finance & Exchange Rates (Questions 131–140)
15.Free Cash Flow, Project Analysis & Valuation Applications (Questions 141–150)
,Time Value of Money
1. What is the future value of $1,000 invested for 3 years at an annual interest rate of 8%, compounded
annually?
A. $1,259.71
B. $1,240.00
C. $1,080.00
D. $1,300.00
Correct Answer: A
Rationale: FV = PV x (1+r)^n = $1,000 x (1.08)^3 = $1,000 x 1.259712 = $1,259.71.
2. What is the present value of $5,000 to be received in 4 years, discounted at an annual rate of 6%?
A. $3,960.47
B. $4,700.00
C. $5,300.00
D. $3,000.00
Correct Answer: A
Rationale: PV = FV / (1+r)^n = $5,000 / (1.06)^4 = $5,.26248 = $3,960.47.
3. Which term describes the concept that a dollar received today is worth more than a dollar received in the
future?
A. Time value of money
B. Opportunity cost
C. Risk premium
D. Present value bias
Correct Answer: A
Rationale: Time value of money reflects that money available today can be invested to earn a return, making it
worth more than the same amount received later.
4. What is the future value of an ordinary annuity of $2,000 per year for 5 years at an annual interest rate of
7%?
A. $11,501.48
B. $10,000.00
C. $14,000.00
D. $9,345.60
Correct Answer: A
Rationale: FV of annuity = PMT x [((1+r)^n - 1) / r] = $2,000 x [((1.07)^5 - 1) / 0.07] = $2,000 x 5.75074 =
$11,501.48.
5. What is the present value of an ordinary annuity paying $3,000 per year for 6 years, discounted at 5%
annually?
A. $15,227.83
B. $18,000.00
C. $12,780.00
D. $16,500.00
Correct Answer: A
Rationale: PV of annuity = PMT x [(1 - (1+r)^-n) / r] = $3,000 x [(1 - (1.05)^-6) / 0.05] = $3,000 x 5.07569 =
$15,227.06 (approximately $15,227.83 with rounding).
6. Which term describes an annuity in which payments occur at the beginning of each period rather than at
the end?
A. Annuity due
B. Ordinary annuity
C. Perpetuity
D. Deferred annuity
Correct Answer: A
, Rationale: An annuity due has payments occurring at the beginning of each period, resulting in a higher present
and future value compared to an ordinary annuity with identical cash flows, due to one extra period of
compounding/discounting.
7. What is the present value of a perpetuity that pays $500 per year, given a discount rate of 5%?
A. $10,000
B. $2,500
C. $5,000
D. $25,000
Correct Answer: A
Rationale: PV of a perpetuity = Payment / Discount rate = $.05 = $10,000.
8. What is the present value of a growing perpetuity that pays $1,000 next year, grows at 3% annually, with a
discount rate of 8%?
A. $20,000
B. $12,500
C. $33,333
D. $10,000
Correct Answer: A
Rationale: PV of growing perpetuity = Payment / (Discount rate - Growth rate) = $1,000 / (0.08 - 0.03) =
$1,.05 = $20,000.
9. Which formula correctly calculates the effective annual rate (EAR) given a stated (nominal) annual rate
compounded monthly?
A. EAR = (1 + Nominal rate/12)^12 - 1
B. EAR = Nominal rate x 12
C. EAR = Nominal rate / 12
D. EAR = (1 + Nominal rate)^12 - 1
Correct Answer: A
Rationale: EAR = (1 + i/m)^m - 1, where i is the nominal annual rate and m is the number of compounding
periods per year (12 for monthly compounding).
10. A stated annual interest rate of 12% compounded monthly results in an effective annual rate closest to:
A. 12.68%
B. 12.00%
C. 13.00%
D. 12.50%
Correct Answer: A
Rationale: EAR = (1 + 0.12/12)^12 - 1 = (1.01)^12 - 1 = 1.126825 - 1 = 12.68%.
, Bond Valuation
11. Which term describes the fixed periodic interest payment a bond pays to its holder, based on the bond's
coupon rate and face value?
A. Coupon payment
B. Yield to maturity
C. Face value
D. Discount rate
Correct Answer: A
Rationale: The coupon payment is the periodic interest payment, calculated as the coupon rate multiplied by
the bond's face (par) value.
12. Which term describes the total return an investor will earn if a bond is held until it matures, considering
both coupon payments and any capital gain or loss?
A. Yield to maturity (YTM)
B. Coupon rate
C. Current yield
D. Face value
Correct Answer: A
Rationale: Yield to maturity is the internal rate of return on a bond if held to maturity, incorporating coupon
income and the difference between purchase price and face value.
13. A bond has a face value of $1,000, a 6% annual coupon rate, and 10 years to maturity. What is the annual
coupon payment?
A. $60
B. $600
C. $100
D. $6
Correct Answer: A
Rationale: Annual coupon payment = Coupon rate x Face value = 0.06 x $1,000 = $60.
14. When a bond's market price is above its face value, the bond is said to be selling at a:
A. Premium
B. Discount
C. Par value
D. Yield adjustment
Correct Answer: A
Rationale: A bond selling above its face value is selling at a premium, which typically occurs when the coupon
rate exceeds the market yield/required rate of return.
15. When a bond's market price is below its face value, the bond is said to be selling at a:
A. Discount
B. Premium
C. Par value
D. Fixed rate
Correct Answer: A
Rationale: A bond selling below its face value is selling at a discount, which typically occurs when the coupon
rate is lower than the market yield/required rate of return.
16. Which relationship best describes how bond prices react to changes in market interest rates?
A. Bond prices and interest rates move inversely (when rates rise, bond prices fall, and vice versa)
B. Bond prices and interest rates move in the same direction
C. Bond prices are unaffected by changes in market interest rates
D. Only short-term bonds are affected by interest rate changes
Correct Answer: A
Edition by Jonathan Berk
Final Exam Practice Question Bank
150 Practice Questions with Answers & Rationales
This document has questions covering core corporate finance topics (time value of money, bond valuation, stock
valuation, capital budgeting/NPV/IRR, risk & return/portfolio theory, CAPM & cost of capital, capital
structure/leverage, dividend policy, working capital management, financial statement analysis, options/derivatives
basics, mergers & acquisitions, efficient markets/behavioral finance/governance, international finance, and free cash
flow/project analysis).
Contents
1.Time Value of Money (Questions 1–10)
2Bond Valuation (Questions 11–20)
3.Stock Valuation (Questions 21–30)
4.Capital Budgeting: NPV, IRR & Payback (Questions 31–40)
5.Risk, Return & Portfolio Theory (Questions 41–50)
6.CAPM & Cost of Capital (Questions 51–60)
7.Capital Structure & Leverage (Questions 61–70)
8.Dividend Policy & Payout Decisions (Questions 71–80)
9.Working Capital Management (Questions 81–90)
10.Financial Statement Analysis & Ratios (Questions 91–100)
11.Options, Derivatives & Risk Management Basics (Questions 101–110)
12.Mergers, Acquisitions & Corporate Restructuring (Questions 111–120)
13.Efficient Markets, Behavioral Finance & Corporate Governance (Questions 121–130)
14.International Finance & Exchange Rates (Questions 131–140)
15.Free Cash Flow, Project Analysis & Valuation Applications (Questions 141–150)
,Time Value of Money
1. What is the future value of $1,000 invested for 3 years at an annual interest rate of 8%, compounded
annually?
A. $1,259.71
B. $1,240.00
C. $1,080.00
D. $1,300.00
Correct Answer: A
Rationale: FV = PV x (1+r)^n = $1,000 x (1.08)^3 = $1,000 x 1.259712 = $1,259.71.
2. What is the present value of $5,000 to be received in 4 years, discounted at an annual rate of 6%?
A. $3,960.47
B. $4,700.00
C. $5,300.00
D. $3,000.00
Correct Answer: A
Rationale: PV = FV / (1+r)^n = $5,000 / (1.06)^4 = $5,.26248 = $3,960.47.
3. Which term describes the concept that a dollar received today is worth more than a dollar received in the
future?
A. Time value of money
B. Opportunity cost
C. Risk premium
D. Present value bias
Correct Answer: A
Rationale: Time value of money reflects that money available today can be invested to earn a return, making it
worth more than the same amount received later.
4. What is the future value of an ordinary annuity of $2,000 per year for 5 years at an annual interest rate of
7%?
A. $11,501.48
B. $10,000.00
C. $14,000.00
D. $9,345.60
Correct Answer: A
Rationale: FV of annuity = PMT x [((1+r)^n - 1) / r] = $2,000 x [((1.07)^5 - 1) / 0.07] = $2,000 x 5.75074 =
$11,501.48.
5. What is the present value of an ordinary annuity paying $3,000 per year for 6 years, discounted at 5%
annually?
A. $15,227.83
B. $18,000.00
C. $12,780.00
D. $16,500.00
Correct Answer: A
Rationale: PV of annuity = PMT x [(1 - (1+r)^-n) / r] = $3,000 x [(1 - (1.05)^-6) / 0.05] = $3,000 x 5.07569 =
$15,227.06 (approximately $15,227.83 with rounding).
6. Which term describes an annuity in which payments occur at the beginning of each period rather than at
the end?
A. Annuity due
B. Ordinary annuity
C. Perpetuity
D. Deferred annuity
Correct Answer: A
, Rationale: An annuity due has payments occurring at the beginning of each period, resulting in a higher present
and future value compared to an ordinary annuity with identical cash flows, due to one extra period of
compounding/discounting.
7. What is the present value of a perpetuity that pays $500 per year, given a discount rate of 5%?
A. $10,000
B. $2,500
C. $5,000
D. $25,000
Correct Answer: A
Rationale: PV of a perpetuity = Payment / Discount rate = $.05 = $10,000.
8. What is the present value of a growing perpetuity that pays $1,000 next year, grows at 3% annually, with a
discount rate of 8%?
A. $20,000
B. $12,500
C. $33,333
D. $10,000
Correct Answer: A
Rationale: PV of growing perpetuity = Payment / (Discount rate - Growth rate) = $1,000 / (0.08 - 0.03) =
$1,.05 = $20,000.
9. Which formula correctly calculates the effective annual rate (EAR) given a stated (nominal) annual rate
compounded monthly?
A. EAR = (1 + Nominal rate/12)^12 - 1
B. EAR = Nominal rate x 12
C. EAR = Nominal rate / 12
D. EAR = (1 + Nominal rate)^12 - 1
Correct Answer: A
Rationale: EAR = (1 + i/m)^m - 1, where i is the nominal annual rate and m is the number of compounding
periods per year (12 for monthly compounding).
10. A stated annual interest rate of 12% compounded monthly results in an effective annual rate closest to:
A. 12.68%
B. 12.00%
C. 13.00%
D. 12.50%
Correct Answer: A
Rationale: EAR = (1 + 0.12/12)^12 - 1 = (1.01)^12 - 1 = 1.126825 - 1 = 12.68%.
, Bond Valuation
11. Which term describes the fixed periodic interest payment a bond pays to its holder, based on the bond's
coupon rate and face value?
A. Coupon payment
B. Yield to maturity
C. Face value
D. Discount rate
Correct Answer: A
Rationale: The coupon payment is the periodic interest payment, calculated as the coupon rate multiplied by
the bond's face (par) value.
12. Which term describes the total return an investor will earn if a bond is held until it matures, considering
both coupon payments and any capital gain or loss?
A. Yield to maturity (YTM)
B. Coupon rate
C. Current yield
D. Face value
Correct Answer: A
Rationale: Yield to maturity is the internal rate of return on a bond if held to maturity, incorporating coupon
income and the difference between purchase price and face value.
13. A bond has a face value of $1,000, a 6% annual coupon rate, and 10 years to maturity. What is the annual
coupon payment?
A. $60
B. $600
C. $100
D. $6
Correct Answer: A
Rationale: Annual coupon payment = Coupon rate x Face value = 0.06 x $1,000 = $60.
14. When a bond's market price is above its face value, the bond is said to be selling at a:
A. Premium
B. Discount
C. Par value
D. Yield adjustment
Correct Answer: A
Rationale: A bond selling above its face value is selling at a premium, which typically occurs when the coupon
rate exceeds the market yield/required rate of return.
15. When a bond's market price is below its face value, the bond is said to be selling at a:
A. Discount
B. Premium
C. Par value
D. Fixed rate
Correct Answer: A
Rationale: A bond selling below its face value is selling at a discount, which typically occurs when the coupon
rate is lower than the market yield/required rate of return.
16. Which relationship best describes how bond prices react to changes in market interest rates?
A. Bond prices and interest rates move inversely (when rates rise, bond prices fall, and vice versa)
B. Bond prices and interest rates move in the same direction
C. Bond prices are unaffected by changes in market interest rates
D. Only short-term bonds are affected by interest rate changes
Correct Answer: A
