AU FNCE 371 Applications in
Corporate Finance – Assignment 1
Marked Cases | 2026–2027
1. In corporate finance, the primary goal of financial management is generally
considered to be:
A) Maximizing current profits
B) Maximizing shareholder wealth ✅
C) Minimizing risk exposure
D) Maximizing market share
2. Which of the following is NOT a typical source of long-term financing for a
corporation?
A) Common equity
B) Preferred equity
C) Trade credit ✅
D) Long-term debt
3. The weighted average cost of capital (WACC) represents:
A) The cost of equity only
B) The average rate of return required by all capital providers ✅
C) The interest rate on bank loans
D) The dividend yield on common stock
4. A company's capital structure refers to:
,A) Its mix of debt and equity financing ✅
B) Its organizational chart
C) Its short-term asset management
D) Its dividend policy
5. According to Modigliani and Miller (1958), in a world without taxes, bankruptcy
costs, and asymmetric information, capital structure:
A) Determines firm value
B) Is irrelevant to firm value ✅
C) Should be 100% debt
D) Should be 100% equity
6. Which of the following is a direct cost of financial distress?
A) Loss of customer confidence
B) Legal and administrative fees in bankruptcy ✅
C) Reduced employee morale
D) Lost sales due to reputation damage
7. The static trade-off theory of capital structure suggests firms balance:
A) Dividends and retained earnings
B) Tax benefits of debt against costs of financial distress ✅
C) Current assets and current liabilities
D) Equity issuance and share repurchases
8. Pecking order theory suggests that firms prefer financing in which order?
A) Equity, debt, internal funds
B) Debt, equity, internal funds
C) Internal funds, debt, equity ✅
D) Internal funds, equity, debt
,9. A firm's cost of equity is typically estimated using:
A) The coupon rate on its bonds
B) The Capital Asset Pricing Model (CAPM) ✅
C) The prime lending rate
D) The dividend payout ratio
10. Which of the following increases a firm's financial leverage?
A) Issuing new common shares
B) Retaining earnings
C) Issuing corporate bonds ✅
D) Converting debt to equity
11. In the context of corporate finance, "agency costs" refer to:
A) Costs of hiring external auditors
B) Costs arising from conflicts between managers and shareholders ✅
C) Costs of regulatory compliance
D) Costs of issuing new securities
12. Which of the following is a key assumption of the Modigliani-Miller
Proposition I without taxes?
A) Firms can borrow at different rates
B) Capital markets are perfect and frictionless ✅
C) Bankruptcy costs are significant
D) Information is asymmetric
13. The present value of a firm's expected future cash flows, discounted at the
WACC, is known as:
A) Book value of equity
B) Enterprise value ✅
, C) Market capitalization
D) Liquidation value
14. A project's net present value (NPV) is calculated as:
A) PV of cash inflows minus PV of cash outflows ✅
B) PV of cash inflows plus PV of cash outflows
C) IRR minus WACC
D) Payback period times annual cash flow
15. Which capital budgeting technique ignores the time value of money?
A) Net Present Value
B) Internal Rate of Return
C) Payback Period ✅
D) Profitability Index
16. The internal rate of return (IRR) is the discount rate that:
A) Maximizes NPV
B) Makes NPV equal to zero ✅
C) Equals the WACC
D) Equals the cost of debt
17. When evaluating mutually exclusive projects, the best method is generally:
A) Payback period
B) IRR
C) NPV ✅
D) Accounting rate of return
18. A firm's beta coefficient measures:
A) Total risk
B) Systematic risk ✅
Corporate Finance – Assignment 1
Marked Cases | 2026–2027
1. In corporate finance, the primary goal of financial management is generally
considered to be:
A) Maximizing current profits
B) Maximizing shareholder wealth ✅
C) Minimizing risk exposure
D) Maximizing market share
2. Which of the following is NOT a typical source of long-term financing for a
corporation?
A) Common equity
B) Preferred equity
C) Trade credit ✅
D) Long-term debt
3. The weighted average cost of capital (WACC) represents:
A) The cost of equity only
B) The average rate of return required by all capital providers ✅
C) The interest rate on bank loans
D) The dividend yield on common stock
4. A company's capital structure refers to:
,A) Its mix of debt and equity financing ✅
B) Its organizational chart
C) Its short-term asset management
D) Its dividend policy
5. According to Modigliani and Miller (1958), in a world without taxes, bankruptcy
costs, and asymmetric information, capital structure:
A) Determines firm value
B) Is irrelevant to firm value ✅
C) Should be 100% debt
D) Should be 100% equity
6. Which of the following is a direct cost of financial distress?
A) Loss of customer confidence
B) Legal and administrative fees in bankruptcy ✅
C) Reduced employee morale
D) Lost sales due to reputation damage
7. The static trade-off theory of capital structure suggests firms balance:
A) Dividends and retained earnings
B) Tax benefits of debt against costs of financial distress ✅
C) Current assets and current liabilities
D) Equity issuance and share repurchases
8. Pecking order theory suggests that firms prefer financing in which order?
A) Equity, debt, internal funds
B) Debt, equity, internal funds
C) Internal funds, debt, equity ✅
D) Internal funds, equity, debt
,9. A firm's cost of equity is typically estimated using:
A) The coupon rate on its bonds
B) The Capital Asset Pricing Model (CAPM) ✅
C) The prime lending rate
D) The dividend payout ratio
10. Which of the following increases a firm's financial leverage?
A) Issuing new common shares
B) Retaining earnings
C) Issuing corporate bonds ✅
D) Converting debt to equity
11. In the context of corporate finance, "agency costs" refer to:
A) Costs of hiring external auditors
B) Costs arising from conflicts between managers and shareholders ✅
C) Costs of regulatory compliance
D) Costs of issuing new securities
12. Which of the following is a key assumption of the Modigliani-Miller
Proposition I without taxes?
A) Firms can borrow at different rates
B) Capital markets are perfect and frictionless ✅
C) Bankruptcy costs are significant
D) Information is asymmetric
13. The present value of a firm's expected future cash flows, discounted at the
WACC, is known as:
A) Book value of equity
B) Enterprise value ✅
, C) Market capitalization
D) Liquidation value
14. A project's net present value (NPV) is calculated as:
A) PV of cash inflows minus PV of cash outflows ✅
B) PV of cash inflows plus PV of cash outflows
C) IRR minus WACC
D) Payback period times annual cash flow
15. Which capital budgeting technique ignores the time value of money?
A) Net Present Value
B) Internal Rate of Return
C) Payback Period ✅
D) Profitability Index
16. The internal rate of return (IRR) is the discount rate that:
A) Maximizes NPV
B) Makes NPV equal to zero ✅
C) Equals the WACC
D) Equals the cost of debt
17. When evaluating mutually exclusive projects, the best method is generally:
A) Payback period
B) IRR
C) NPV ✅
D) Accounting rate of return
18. A firm's beta coefficient measures:
A) Total risk
B) Systematic risk ✅
