FIN 300 W07 FINAL EXAM PART 4 |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. When calculating the Weighted Average Cost of Capital (WACC), why is the cost of debt
adjusted by (1 - T)?
A. Because dividends are tax-deductible for the corporation.
B. Because flotation costs for debt are higher than for equity.
C. Because the tax rate reduces the value of the firm’s equity.
D. Because interest expense is tax-deductible, reducing the effective cost to the firm.
Answer: D
Conceptual Explanation: Interest payments on debt are tax-deductible expenses in many
jurisdictions. This creates a tax shield, effectively lowering the after-tax cost of borrowing
compared to the pre-tax interest rate.
2. Under the CAPM, if the expected return on the market is 12%, the risk-free rate is 4%, and
a stock has a beta of 1.5, what is the required return?
A. 12.0%
,B. 18.0%
C. 16.0%
D. 14.0%
Answer: C
Conceptual Explanation: Required Return = Risk-free Rate + Beta * (Market Return - Risk-
free Rate). Here, 4% + 1.5 * (12% - 4%) = 4% + 12% = 16%.
3. Which of the following would increase the Net Present Value (NPV) of a project, all else
being equal?
A. Increasing the discount rate.
B. Shortening the recovery period for depreciation (faster depreciation).
C. Decreasing the estimated salvage value.
D. Increasing the initial net working capital requirement.
Answer: B
Conceptual Explanation: Accelerated depreciation creates larger tax shields earlier in the
project life. Since a dollar today is worth more than a dollar tomorrow, this increases the
NPV.
4. A firm’s degree of operating leverage (DOL) is highest when:
A. Variable costs are a high percentage of total costs.
B. Fixed costs are a high percentage of total costs.
, C. The firm has no debt.
D. Sales are significantly above the break-even point.
Answer: B
Conceptual Explanation: Operating leverage is the sensitivity of EBIT to changes in sales.
High fixed costs relative to variable costs mean that small changes in sales lead to large
percentage changes in EBIT.
5. The conflict between NPV and IRR for mutually exclusive projects is most likely to occur
when:
A. The projects have similar investment scales and timing.
B. The discount rate is much higher than the IRR.
C. The projects have significantly different scales or timing of cash flows.
D. Both projects have conventional cash flow patterns.
Answer: C
Conceptual Explanation: Differences in the scale of investment or the timing of cash flows
(e.g., early vs late heavy cash flows) cause the NPV profiles to cross, leading to conflicting
rankings at different discount rates.
6. What is the primary implication of Modigliani and Miller Proposition I (without taxes)?
A. The value of the firm is independent of its capital structure.
B. A firm should always use as much debt as possible.
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. When calculating the Weighted Average Cost of Capital (WACC), why is the cost of debt
adjusted by (1 - T)?
A. Because dividends are tax-deductible for the corporation.
B. Because flotation costs for debt are higher than for equity.
C. Because the tax rate reduces the value of the firm’s equity.
D. Because interest expense is tax-deductible, reducing the effective cost to the firm.
Answer: D
Conceptual Explanation: Interest payments on debt are tax-deductible expenses in many
jurisdictions. This creates a tax shield, effectively lowering the after-tax cost of borrowing
compared to the pre-tax interest rate.
2. Under the CAPM, if the expected return on the market is 12%, the risk-free rate is 4%, and
a stock has a beta of 1.5, what is the required return?
A. 12.0%
,B. 18.0%
C. 16.0%
D. 14.0%
Answer: C
Conceptual Explanation: Required Return = Risk-free Rate + Beta * (Market Return - Risk-
free Rate). Here, 4% + 1.5 * (12% - 4%) = 4% + 12% = 16%.
3. Which of the following would increase the Net Present Value (NPV) of a project, all else
being equal?
A. Increasing the discount rate.
B. Shortening the recovery period for depreciation (faster depreciation).
C. Decreasing the estimated salvage value.
D. Increasing the initial net working capital requirement.
Answer: B
Conceptual Explanation: Accelerated depreciation creates larger tax shields earlier in the
project life. Since a dollar today is worth more than a dollar tomorrow, this increases the
NPV.
4. A firm’s degree of operating leverage (DOL) is highest when:
A. Variable costs are a high percentage of total costs.
B. Fixed costs are a high percentage of total costs.
, C. The firm has no debt.
D. Sales are significantly above the break-even point.
Answer: B
Conceptual Explanation: Operating leverage is the sensitivity of EBIT to changes in sales.
High fixed costs relative to variable costs mean that small changes in sales lead to large
percentage changes in EBIT.
5. The conflict between NPV and IRR for mutually exclusive projects is most likely to occur
when:
A. The projects have similar investment scales and timing.
B. The discount rate is much higher than the IRR.
C. The projects have significantly different scales or timing of cash flows.
D. Both projects have conventional cash flow patterns.
Answer: C
Conceptual Explanation: Differences in the scale of investment or the timing of cash flows
(e.g., early vs late heavy cash flows) cause the NPV profiles to cross, leading to conflicting
rankings at different discount rates.
6. What is the primary implication of Modigliani and Miller Proposition I (without taxes)?
A. The value of the firm is independent of its capital structure.
B. A firm should always use as much debt as possible.
