FOUNDATIONS OF FINANCE 10TH EDITION — TEST
PAPER / EXAMINATION QUESTIONS PRACTICE
QUESTION BANK [QUESTIONS 1-200] — UPDATED
2026/2027 | DETAILED RATIONALES
INTRODUCTION
Foundations of Finance, 10th Edition provides a comprehensive framework for understanding
the principles used to make financial decisions in businesses and investment settings. The
material is particularly useful for students studying corporate finance, financial management,
investments, valuation, risk and return, and financial markets. A strong command of these
concepts is essential because finance examinations typically require students not merely to recall
formulas, but to apply them to realistic financial situations and interpret the results.
This practice question bank is designed for students preparing for examinations based on
foundational finance concepts. It emphasizes difficult, application-oriented scenarios involving
time value of money, financial statement analysis, risk and return, valuation, capital budgeting,
cost of capital, capital structure, working-capital management, and related financial decisions.
The questions are deliberately constructed to require calculation, interpretation, comparison, and
judgment. Working through the questions and carefully studying the rationales can help identify
conceptual weaknesses, improve problem-solving speed, strengthen formula selection, and build
confidence before an examination.
CORE DOMAINS TESTED
1. Time Value of Money — Present value, future value, annuities, perpetuities, and cash-
flow timing.
2. Financial Statements and Cash Flow — Income statements, balance sheets, cash flows,
and accounting-based financial analysis.
3. Financial Ratio Analysis — Liquidity, efficiency, leverage, profitability, and market-
value measures.
4. Risk and Return — Expected returns, variance, standard deviation, diversification, and
systematic risk.
5. Interest Rates and Bond Valuation — Bond pricing, yields, interest-rate risk, and term
structure.
6. Stock Valuation — Dividend models, growth assumptions, required returns, and
valuation.
7. Capital Budgeting — NPV, IRR, payback, profitability analysis, and incremental cash
flows.
8. Cost of Capital — Required returns, WACC, component costs, and financing decisions.
9. Capital Structure — Debt-equity decisions, financial leverage, and financing risk.
10. Working Capital Management — Cash, receivables, inventory, payables, and operating
cycles.
, 11. Corporate Financial Decisions — Agency considerations, financing policy, payout
decisions, and value creation.
12. Financial Markets and Institutions — Market mechanisms, intermediaries, securities,
and financing sources.
QUESTIONS 1-200
Q1:
A company can receive CHF 80,000 today or CHF 100,000 three years from now. If its
opportunity cost of capital is 7% annually, which alternative has the greater economic value?
A) CHF 80,000 today
B) CHF 100,000 in three years
C) Both have exactly the same value
D) The future payment, because nominal amounts always have greater value
Rationale: The present value of CHF 100,000 received in three years is approximately CHF
81,630, calculated as 100,000/(1.07)^3. This exceeds the CHF 80,000 available today, so the
future payment has the greater economic value. Option A is incorrect because discounting the
future amount still produces a value above CHF 80,000. Option C is incorrect because the two
amounts are not financially equivalent at a 7% opportunity cost. Option D gives an incorrect
general principle: future money is normally worth less than an equal nominal amount today.
Q2:
An investor deposits CHF 12,000 into an account earning 6% annually with annual
compounding. Approximately how much will the account contain after five years?
A) CHF 13,800
B) CHF 15,000
C) CHF 16,059
D) CHF 16,800
Rationale: Future value equals 12,000(1.06)^5, which is approximately CHF 16,059. Option A
understates the effect of compound growth. Option B does not correctly apply five years of
compounding. Option D overstates the accumulated value. The key concept is that interest
earned in earlier periods itself earns additional interest in later periods.
Q3:
A firm is evaluating a project requiring an initial investment of CHF 200,000 and generating
CHF 70,000 at the end of each of the next four years. If the required return is 10%, what is the
approximate NPV?
,A) CHF 22,000
B) CHF 0
C) CHF 21,886
D) CHF 48,000
Rationale: The present value of the four CHF 70,000 cash flows is 70,000 × [1 −
1/(1.10)^4]/0.10, or approximately CHF 221,886. Subtracting the CHF 200,000 initial
investment gives an NPV of approximately CHF 21,886. Option B would be correct only if the
discounted inflows exactly equaled the investment. Options A and D are incorrect numerical
results. Because NPV is positive, the project adds value assuming the cash-flow estimates and
discount rate are appropriate.
Q4:
A borrower must choose between a loan charging 8% nominal interest compounded annually and
another charging 7.7% nominal interest compounded monthly. Which is more relevant when
comparing their economic cost?
A) Nominal interest rate only
B) Effective annual rate
C) Loan maturity only
D) Principal amount only
Rationale: Effective annual rate incorporates the effect of compounding and therefore permits
meaningful comparison between loans with different compounding frequencies. The monthly-
compounded 7.7% nominal rate has an effective annual rate of approximately (1 + 0.077/12)^12
− 1, or about 8.0%. Option A ignores compounding. Option C ignores the periodic financing
cost. Option D describes the amount borrowed rather than the rate at which it costs the
borrower.
Q5:
A project has a positive NPV when discounted at the firm's current required return. Management
discovers that the project's cash flows are substantially more uncertain than those of the firm's
existing operations. What is the most appropriate response?
A) Automatically accept because NPV is positive
B) Automatically reject because uncertainty is high
C) Reassess the discount rate or cash flows to reflect project-specific risk
D) Ignore risk because NPV is an accounting measure
Rationale: A positive NPV is meaningful only if the discount rate appropriately reflects the risk
of the project's cash flows. A riskier project may require a higher required return, which could
reduce or eliminate its NPV. Option A is too mechanical because the original discount rate may
not be appropriate. Option B is equally inappropriate because risk does not automatically make
, a project undesirable. Option D is incorrect because NPV is a valuation measure based on cash
flows and opportunity cost, not an accounting profit measure.
Q6:
A firm's current assets are CHF 500,000 and current liabilities are CHF 400,000. Management
pays CHF 50,000 of accounts payable using cash. What happens to the current ratio?
A) It decreases
B) It remains unchanged
C) It increases
D) It becomes zero
Rationale: Before payment, the current ratio is 500,000/400,000 = 1.25. After paying CHF
50,000, both current assets and current liabilities fall to CHF 450,000 and CHF 350,000
respectively. The new ratio is approximately 1.286, so the ratio increases. Option A is incorrect
because the denominator declines proportionally more than the numerator. Option B overlooks
this asymmetry. Option D is clearly incorrect.
Q7:
A company reports net income of CHF 300,000, depreciation of CHF 80,000, an increase in
accounts receivable of CHF 40,000, and an increase in accounts payable of CHF 25,000.
Ignoring other items, operating cash flow is closest to:
A) CHF 265,000
B) CHF 300,000
C) CHF 365,000
D) CHF 445,000
Rationale: Starting with net income, add noncash depreciation and adjust for working-capital
changes: 300,000 + 80,000 − 40,000 + 25,000 = CHF 365,000. The increase in receivables
represents revenue not yet collected, so it reduces operating cash flow. The increase in payables
represents expenses not yet paid, increasing cash flow. Option B ignores these adjustments,
while A and D incorrectly apply them.
Q8:
A firm's inventory turnover falls from 8.0 to 5.5 while sales remain approximately constant.
Which interpretation is most appropriate?
A) Inventory management has necessarily improved
B) The firm's liquidity has necessarily doubled
C) Inventory is moving more slowly, potentially increasing carrying costs and obsolescence
risk
D) The firm's profit margin must have increased
PAPER / EXAMINATION QUESTIONS PRACTICE
QUESTION BANK [QUESTIONS 1-200] — UPDATED
2026/2027 | DETAILED RATIONALES
INTRODUCTION
Foundations of Finance, 10th Edition provides a comprehensive framework for understanding
the principles used to make financial decisions in businesses and investment settings. The
material is particularly useful for students studying corporate finance, financial management,
investments, valuation, risk and return, and financial markets. A strong command of these
concepts is essential because finance examinations typically require students not merely to recall
formulas, but to apply them to realistic financial situations and interpret the results.
This practice question bank is designed for students preparing for examinations based on
foundational finance concepts. It emphasizes difficult, application-oriented scenarios involving
time value of money, financial statement analysis, risk and return, valuation, capital budgeting,
cost of capital, capital structure, working-capital management, and related financial decisions.
The questions are deliberately constructed to require calculation, interpretation, comparison, and
judgment. Working through the questions and carefully studying the rationales can help identify
conceptual weaknesses, improve problem-solving speed, strengthen formula selection, and build
confidence before an examination.
CORE DOMAINS TESTED
1. Time Value of Money — Present value, future value, annuities, perpetuities, and cash-
flow timing.
2. Financial Statements and Cash Flow — Income statements, balance sheets, cash flows,
and accounting-based financial analysis.
3. Financial Ratio Analysis — Liquidity, efficiency, leverage, profitability, and market-
value measures.
4. Risk and Return — Expected returns, variance, standard deviation, diversification, and
systematic risk.
5. Interest Rates and Bond Valuation — Bond pricing, yields, interest-rate risk, and term
structure.
6. Stock Valuation — Dividend models, growth assumptions, required returns, and
valuation.
7. Capital Budgeting — NPV, IRR, payback, profitability analysis, and incremental cash
flows.
8. Cost of Capital — Required returns, WACC, component costs, and financing decisions.
9. Capital Structure — Debt-equity decisions, financial leverage, and financing risk.
10. Working Capital Management — Cash, receivables, inventory, payables, and operating
cycles.
, 11. Corporate Financial Decisions — Agency considerations, financing policy, payout
decisions, and value creation.
12. Financial Markets and Institutions — Market mechanisms, intermediaries, securities,
and financing sources.
QUESTIONS 1-200
Q1:
A company can receive CHF 80,000 today or CHF 100,000 three years from now. If its
opportunity cost of capital is 7% annually, which alternative has the greater economic value?
A) CHF 80,000 today
B) CHF 100,000 in three years
C) Both have exactly the same value
D) The future payment, because nominal amounts always have greater value
Rationale: The present value of CHF 100,000 received in three years is approximately CHF
81,630, calculated as 100,000/(1.07)^3. This exceeds the CHF 80,000 available today, so the
future payment has the greater economic value. Option A is incorrect because discounting the
future amount still produces a value above CHF 80,000. Option C is incorrect because the two
amounts are not financially equivalent at a 7% opportunity cost. Option D gives an incorrect
general principle: future money is normally worth less than an equal nominal amount today.
Q2:
An investor deposits CHF 12,000 into an account earning 6% annually with annual
compounding. Approximately how much will the account contain after five years?
A) CHF 13,800
B) CHF 15,000
C) CHF 16,059
D) CHF 16,800
Rationale: Future value equals 12,000(1.06)^5, which is approximately CHF 16,059. Option A
understates the effect of compound growth. Option B does not correctly apply five years of
compounding. Option D overstates the accumulated value. The key concept is that interest
earned in earlier periods itself earns additional interest in later periods.
Q3:
A firm is evaluating a project requiring an initial investment of CHF 200,000 and generating
CHF 70,000 at the end of each of the next four years. If the required return is 10%, what is the
approximate NPV?
,A) CHF 22,000
B) CHF 0
C) CHF 21,886
D) CHF 48,000
Rationale: The present value of the four CHF 70,000 cash flows is 70,000 × [1 −
1/(1.10)^4]/0.10, or approximately CHF 221,886. Subtracting the CHF 200,000 initial
investment gives an NPV of approximately CHF 21,886. Option B would be correct only if the
discounted inflows exactly equaled the investment. Options A and D are incorrect numerical
results. Because NPV is positive, the project adds value assuming the cash-flow estimates and
discount rate are appropriate.
Q4:
A borrower must choose between a loan charging 8% nominal interest compounded annually and
another charging 7.7% nominal interest compounded monthly. Which is more relevant when
comparing their economic cost?
A) Nominal interest rate only
B) Effective annual rate
C) Loan maturity only
D) Principal amount only
Rationale: Effective annual rate incorporates the effect of compounding and therefore permits
meaningful comparison between loans with different compounding frequencies. The monthly-
compounded 7.7% nominal rate has an effective annual rate of approximately (1 + 0.077/12)^12
− 1, or about 8.0%. Option A ignores compounding. Option C ignores the periodic financing
cost. Option D describes the amount borrowed rather than the rate at which it costs the
borrower.
Q5:
A project has a positive NPV when discounted at the firm's current required return. Management
discovers that the project's cash flows are substantially more uncertain than those of the firm's
existing operations. What is the most appropriate response?
A) Automatically accept because NPV is positive
B) Automatically reject because uncertainty is high
C) Reassess the discount rate or cash flows to reflect project-specific risk
D) Ignore risk because NPV is an accounting measure
Rationale: A positive NPV is meaningful only if the discount rate appropriately reflects the risk
of the project's cash flows. A riskier project may require a higher required return, which could
reduce or eliminate its NPV. Option A is too mechanical because the original discount rate may
not be appropriate. Option B is equally inappropriate because risk does not automatically make
, a project undesirable. Option D is incorrect because NPV is a valuation measure based on cash
flows and opportunity cost, not an accounting profit measure.
Q6:
A firm's current assets are CHF 500,000 and current liabilities are CHF 400,000. Management
pays CHF 50,000 of accounts payable using cash. What happens to the current ratio?
A) It decreases
B) It remains unchanged
C) It increases
D) It becomes zero
Rationale: Before payment, the current ratio is 500,000/400,000 = 1.25. After paying CHF
50,000, both current assets and current liabilities fall to CHF 450,000 and CHF 350,000
respectively. The new ratio is approximately 1.286, so the ratio increases. Option A is incorrect
because the denominator declines proportionally more than the numerator. Option B overlooks
this asymmetry. Option D is clearly incorrect.
Q7:
A company reports net income of CHF 300,000, depreciation of CHF 80,000, an increase in
accounts receivable of CHF 40,000, and an increase in accounts payable of CHF 25,000.
Ignoring other items, operating cash flow is closest to:
A) CHF 265,000
B) CHF 300,000
C) CHF 365,000
D) CHF 445,000
Rationale: Starting with net income, add noncash depreciation and adjust for working-capital
changes: 300,000 + 80,000 − 40,000 + 25,000 = CHF 365,000. The increase in receivables
represents revenue not yet collected, so it reduces operating cash flow. The increase in payables
represents expenses not yet paid, increasing cash flow. Option B ignores these adjustments,
while A and D incorrectly apply them.
Q8:
A firm's inventory turnover falls from 8.0 to 5.5 while sales remain approximately constant.
Which interpretation is most appropriate?
A) Inventory management has necessarily improved
B) The firm's liquidity has necessarily doubled
C) Inventory is moving more slowly, potentially increasing carrying costs and obsolescence
risk
D) The firm's profit margin must have increased
