ADVANCED CORPORATE FINANCE -
FIN 300 WEEK 07 COMPREHENSIVE
EXAM | QUESTIONS AND ANSWERS
|2026/2027 UPDATE | JUST RELEASED
1. Which of the following statements correctly describes the ‘reinvestment rate assumption’
difference between NPV and IRR?
A. NPV assumes reinvestment at the IRR, while IRR assumes reinvestment at the WACC.
B. Both NPV and IRR assume reinvestment at the risk-free rate.
C. NPV assumes reinvestment at the WACC, while IRR assumes reinvestment at the
project’s internal rate of return.
D. Both NPV and IRR assume reinvestment at the WACC.
Answer: C
Conceptual Explanation: The NPV method mathematically assumes that cash flows are
reinvested at the cost of capital (WACC), whereas the IRR method assumes they are
reinvested at the IRR itself, which can lead to unrealistic return expectations.
2. If a firm’s project has a Profitability Index (PI) of 0.95, which of the following must be true?
A. The NPV is negative.
B. The IRR is greater than the WACC.
,C. The NPV is positive.
D. The project should be accepted regardless of the WACC.
Answer: A
Conceptual Explanation: A Profitability Index less than 1.0 indicates that the present
value of future cash flows is less than the initial investment, meaning the Net Present Value
(NPV) is negative.
3. When considering mutually exclusive projects with different lives, which method is most
appropriate for a fair comparison?
A. Internal Rate of Return (IRR)
B. Discounted Payback Period
C. Equivalent Annual Annuity (EAA)
D. Net Present Value (NPV)
Answer: C
Conceptual Explanation: The EAA method converts the NPV of projects with different
lifespans into a constant annual cash flow, allowing for a direct comparison of their
economic value over time.
4. Under the Capital Asset Pricing Model (CAPM), what happens to the expected return of a
stock if its Beta doubles while the market risk premium remains constant?
A. The expected return doubles.
, B. The risk-free rate must also double.
C. The expected return increases, but not necessarily doubles, depending on the risk-free
rate.
D. The expected return remains unchanged because Beta only measures unsystematic risk.
Answer: C
Conceptual Explanation: Expected Return = Rf + Beta(Rm - Rf). If Beta doubles, only the
risk premium portion of the return doubles. The risk-free rate component remains the
same, so the total return increases but usually less than double.
5. A firm is considering a project that is riskier than its average operations. How should the
firm adjust its evaluation?
A. Decrease the WACC to make the project more attractive.
B. Increase the project’s expected cash flows to compensate for risk.
C. Increase the discount rate above the firm’s WACC.
D. Use the firm’s current WACC to maintain consistency.
Answer: C
Conceptual Explanation: Risk-adjusted discount rates require that projects with higher-
than-average risk be evaluated using a higher discount rate to account for the additional
risk premium required by investors.
FIN 300 WEEK 07 COMPREHENSIVE
EXAM | QUESTIONS AND ANSWERS
|2026/2027 UPDATE | JUST RELEASED
1. Which of the following statements correctly describes the ‘reinvestment rate assumption’
difference between NPV and IRR?
A. NPV assumes reinvestment at the IRR, while IRR assumes reinvestment at the WACC.
B. Both NPV and IRR assume reinvestment at the risk-free rate.
C. NPV assumes reinvestment at the WACC, while IRR assumes reinvestment at the
project’s internal rate of return.
D. Both NPV and IRR assume reinvestment at the WACC.
Answer: C
Conceptual Explanation: The NPV method mathematically assumes that cash flows are
reinvested at the cost of capital (WACC), whereas the IRR method assumes they are
reinvested at the IRR itself, which can lead to unrealistic return expectations.
2. If a firm’s project has a Profitability Index (PI) of 0.95, which of the following must be true?
A. The NPV is negative.
B. The IRR is greater than the WACC.
,C. The NPV is positive.
D. The project should be accepted regardless of the WACC.
Answer: A
Conceptual Explanation: A Profitability Index less than 1.0 indicates that the present
value of future cash flows is less than the initial investment, meaning the Net Present Value
(NPV) is negative.
3. When considering mutually exclusive projects with different lives, which method is most
appropriate for a fair comparison?
A. Internal Rate of Return (IRR)
B. Discounted Payback Period
C. Equivalent Annual Annuity (EAA)
D. Net Present Value (NPV)
Answer: C
Conceptual Explanation: The EAA method converts the NPV of projects with different
lifespans into a constant annual cash flow, allowing for a direct comparison of their
economic value over time.
4. Under the Capital Asset Pricing Model (CAPM), what happens to the expected return of a
stock if its Beta doubles while the market risk premium remains constant?
A. The expected return doubles.
, B. The risk-free rate must also double.
C. The expected return increases, but not necessarily doubles, depending on the risk-free
rate.
D. The expected return remains unchanged because Beta only measures unsystematic risk.
Answer: C
Conceptual Explanation: Expected Return = Rf + Beta(Rm - Rf). If Beta doubles, only the
risk premium portion of the return doubles. The risk-free rate component remains the
same, so the total return increases but usually less than double.
5. A firm is considering a project that is riskier than its average operations. How should the
firm adjust its evaluation?
A. Decrease the WACC to make the project more attractive.
B. Increase the project’s expected cash flows to compensate for risk.
C. Increase the discount rate above the firm’s WACC.
D. Use the firm’s current WACC to maintain consistency.
Answer: C
Conceptual Explanation: Risk-adjusted discount rates require that projects with higher-
than-average risk be evaluated using a higher discount rate to account for the additional
risk premium required by investors.
