CORPORATE FINANCE — 13th EDITION
2026 Original Practice Questions, Answers &
ExplanationsRoss • Westerfield • Jaffe •Jordan
Study guide based on the major topics and chapter
structure of Corporate Finance,
Important Note
This is an original study/practice guide, not the publisher's copyrighted solution manual and not a reproduction of textbook
end-of-chapter questions or answer keys. The questions below are newly written for study. Exact textbook problems can
be solved step-by-step if the user supplies the problem text or pages.
McGraw Hill's 13th-edition materials list 31 chapters spanning corporate-finance fundamentals, valuation, capital
budgeting, risk, capital structure, payout policy, long-term financing, derivatives, short-term finance, mergers, financial
distress, and international corporate finance. This guide follows those subject areas.
Core Formula Sheet
Future value: FV = PV(1+r)^t
Present value: PV = FV/(1+r)^t
Annuity PV: PV = C[1 − 1/(1+r)^t]/r
Perpetuity PV: PV = C/r
NPV = Σ CF_t/(1+r)^t − Initial Investment
IRR: the discount rate that makes NPV = 0
CAPM: E(R_i) = R_f + β_i[E(R_M) − R_f]
Portfolio expected return: E(R_p) = Σ w_i E(R_i)
WACC = (E/V)R_E + (D/V)R_D(1−T_C), using market-value weights
Bond value = PV of coupons + PV of face value
Growing perpetuity: P_0 = C_1/(r−g), where r>g
Operating cash flow: OCF = EBIT + Depreciation − Taxes
Free cash flow: FCF = OCF − Net Capital Spending − Change in NWC
Degree of operating leverage: DOL = % change in EBIT / % change in sales
Degree of financial leverage: DFL = % change in EPS / % change in EBIT
Break-even quantity = Fixed Costs/(Price − Variable Cost)
EOQ = sqrt(2DS/H)
,200 Original Practice Questions with Answers & Rationales
Total questions: 198. Questions are grouped by topic and include conceptual, calculation, and decision-making practice.
1. What is the primary financial objective of a corporation?
Answer: Maximize the current market value of the owners' equity.
Rationale: The finance function ultimately focuses on creating value for shareholders, subject to legal, ethical, and
contractual constraints.
2. Which decision concerns choosing which long-lived assets a firm should acquire?
Answer: Capital budgeting.
Rationale: Capital budgeting evaluates long-term investments and whether their expected benefits justify their costs.
3. What is an agency problem?
Answer: A conflict between the interests of managers and owners.
Rationale: Managers may have incentives that differ from shareholders; governance and contracts are used to reduce
these conflicts.
4. Which market primarily trades previously issued securities?
Answer: The secondary market.
Rationale: Secondary markets provide liquidity and price discovery for securities that have already been issued.
5. What does financial management generally include?
Answer: Investment, financing, and working-capital decisions.
Rationale: Financial managers allocate capital, determine financing sources, and manage short-term financial resources.
6. If assets are $500,000 and liabilities are $320,000, what is owners' equity?
Answer: $180,000.
Rationale: The accounting identity is Assets = Liabilities + Equity, so Equity = $500,000 − $320,000 = $180,000.
7. Why is depreciation added back when calculating operating cash flow using EBIT?
Answer: Because depreciation is a noncash expense.
Rationale: Depreciation reduces accounting income but does not itself use cash in the period.
8. A rise in accounts receivable generally has what effect on cash flow, all else equal?
Answer: It reduces cash flow.
Rationale: An increase means more sales have not yet been collected in cash.
9. What does the statement of cash flows classify?
Answer: Cash flows into operating, investing, and financing activities.
Rationale: These categories explain the major sources and uses of cash during a period.
10. What is net working capital?
, Answer: Current assets minus current liabilities.
Rationale: NWC measures the net short-term investment tied to operating liquidity.
11. What does the current ratio measure?
Answer: Current assets divided by current liabilities.
Rationale: It is a basic liquidity ratio indicating the firm's current-asset coverage of current obligations.
12. What does the debt-to-equity ratio compare?
Answer: Debt to shareholders' equity.
Rationale: It provides a simple measure of financial leverage.
13. What is common-size analysis?
Answer: Expressing financial-statement items as percentages of a common base.
Rationale: For example, income-statement items can be expressed as percentages of sales.
14. What does DuPont analysis decompose ROE into?
Answer: Profit margin, total asset turnover, and financial leverage.
Rationale: The three-part DuPont relation is ROE = margin × turnover × equity multiplier.
15. What is a pro forma financial statement?
Answer: A projected financial statement based on assumptions.
Rationale: Pro forma statements are used for planning and forecasting.
16. What is the present value of $1,210 received in two years at 10%?
Answer: $1,000.
Rationale: PV = 1,210/(1.10)^2 = $1,000.
17. What is the future value of $5,000 invested for 3 years at 8% annually?
Answer: $6,298.56.
Rationale: FV = 5,000(1.08)^3 = $6,298.56.
18. Why is a dollar today generally worth more than a dollar received later?
Answer: Because money can earn a return over time.
Rationale: The time value of money reflects opportunity cost and the ability to invest funds.
19. What happens to present value when the discount rate rises, holding cash flows constant?
Answer: Present value falls.
Rationale: A higher required return discounts future cash flows more heavily.
20. What is an annuity?
Answer: A series of equal cash flows at regular intervals for a specified number of periods.
2026 Original Practice Questions, Answers &
ExplanationsRoss • Westerfield • Jaffe •Jordan
Study guide based on the major topics and chapter
structure of Corporate Finance,
Important Note
This is an original study/practice guide, not the publisher's copyrighted solution manual and not a reproduction of textbook
end-of-chapter questions or answer keys. The questions below are newly written for study. Exact textbook problems can
be solved step-by-step if the user supplies the problem text or pages.
McGraw Hill's 13th-edition materials list 31 chapters spanning corporate-finance fundamentals, valuation, capital
budgeting, risk, capital structure, payout policy, long-term financing, derivatives, short-term finance, mergers, financial
distress, and international corporate finance. This guide follows those subject areas.
Core Formula Sheet
Future value: FV = PV(1+r)^t
Present value: PV = FV/(1+r)^t
Annuity PV: PV = C[1 − 1/(1+r)^t]/r
Perpetuity PV: PV = C/r
NPV = Σ CF_t/(1+r)^t − Initial Investment
IRR: the discount rate that makes NPV = 0
CAPM: E(R_i) = R_f + β_i[E(R_M) − R_f]
Portfolio expected return: E(R_p) = Σ w_i E(R_i)
WACC = (E/V)R_E + (D/V)R_D(1−T_C), using market-value weights
Bond value = PV of coupons + PV of face value
Growing perpetuity: P_0 = C_1/(r−g), where r>g
Operating cash flow: OCF = EBIT + Depreciation − Taxes
Free cash flow: FCF = OCF − Net Capital Spending − Change in NWC
Degree of operating leverage: DOL = % change in EBIT / % change in sales
Degree of financial leverage: DFL = % change in EPS / % change in EBIT
Break-even quantity = Fixed Costs/(Price − Variable Cost)
EOQ = sqrt(2DS/H)
,200 Original Practice Questions with Answers & Rationales
Total questions: 198. Questions are grouped by topic and include conceptual, calculation, and decision-making practice.
1. What is the primary financial objective of a corporation?
Answer: Maximize the current market value of the owners' equity.
Rationale: The finance function ultimately focuses on creating value for shareholders, subject to legal, ethical, and
contractual constraints.
2. Which decision concerns choosing which long-lived assets a firm should acquire?
Answer: Capital budgeting.
Rationale: Capital budgeting evaluates long-term investments and whether their expected benefits justify their costs.
3. What is an agency problem?
Answer: A conflict between the interests of managers and owners.
Rationale: Managers may have incentives that differ from shareholders; governance and contracts are used to reduce
these conflicts.
4. Which market primarily trades previously issued securities?
Answer: The secondary market.
Rationale: Secondary markets provide liquidity and price discovery for securities that have already been issued.
5. What does financial management generally include?
Answer: Investment, financing, and working-capital decisions.
Rationale: Financial managers allocate capital, determine financing sources, and manage short-term financial resources.
6. If assets are $500,000 and liabilities are $320,000, what is owners' equity?
Answer: $180,000.
Rationale: The accounting identity is Assets = Liabilities + Equity, so Equity = $500,000 − $320,000 = $180,000.
7. Why is depreciation added back when calculating operating cash flow using EBIT?
Answer: Because depreciation is a noncash expense.
Rationale: Depreciation reduces accounting income but does not itself use cash in the period.
8. A rise in accounts receivable generally has what effect on cash flow, all else equal?
Answer: It reduces cash flow.
Rationale: An increase means more sales have not yet been collected in cash.
9. What does the statement of cash flows classify?
Answer: Cash flows into operating, investing, and financing activities.
Rationale: These categories explain the major sources and uses of cash during a period.
10. What is net working capital?
, Answer: Current assets minus current liabilities.
Rationale: NWC measures the net short-term investment tied to operating liquidity.
11. What does the current ratio measure?
Answer: Current assets divided by current liabilities.
Rationale: It is a basic liquidity ratio indicating the firm's current-asset coverage of current obligations.
12. What does the debt-to-equity ratio compare?
Answer: Debt to shareholders' equity.
Rationale: It provides a simple measure of financial leverage.
13. What is common-size analysis?
Answer: Expressing financial-statement items as percentages of a common base.
Rationale: For example, income-statement items can be expressed as percentages of sales.
14. What does DuPont analysis decompose ROE into?
Answer: Profit margin, total asset turnover, and financial leverage.
Rationale: The three-part DuPont relation is ROE = margin × turnover × equity multiplier.
15. What is a pro forma financial statement?
Answer: A projected financial statement based on assumptions.
Rationale: Pro forma statements are used for planning and forecasting.
16. What is the present value of $1,210 received in two years at 10%?
Answer: $1,000.
Rationale: PV = 1,210/(1.10)^2 = $1,000.
17. What is the future value of $5,000 invested for 3 years at 8% annually?
Answer: $6,298.56.
Rationale: FV = 5,000(1.08)^3 = $6,298.56.
18. Why is a dollar today generally worth more than a dollar received later?
Answer: Because money can earn a return over time.
Rationale: The time value of money reflects opportunity cost and the ability to invest funds.
19. What happens to present value when the discount rate rises, holding cash flows constant?
Answer: Present value falls.
Rationale: A higher required return discounts future cash flows more heavily.
20. What is an annuity?
Answer: A series of equal cash flows at regular intervals for a specified number of periods.
