MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
MGT 8803 — Business Fundamentals for Analytics
Exam II Finance — Questions and Answers (100% Correct)
Academic Year • Counts 20% of Course Grade
Course MGT 8803 Business Fundamentals for Analytics
Exam Exam II — Finance
Academic Year
Weight 20% of Course Grade
Total Questions 100 multiple-choice (4 options each, one correct)
Time Allotted 180 minutes (suggested)
Cognitive Mix 25% recall, 55% application, 20% analysis
Format 70% application/calculation-based, 30% direct recall
Instructions to the Candidate
• This exam consists of 100 multiple-choice questions organized into 8 sections. Each question carries equal weight;
there is no penalty for incorrect answers, so candidates should attempt every question.
• Each question has exactly one best answer among the four options (A–D). The correct option is marked [CORRECT]
and a detailed rationale follows each question explaining the underlying finance principle, formula application, and
analytics interpretation.
• Calculators (financial or scientific) are permitted. Formula sheets distributed in class may be used. Show all work for
calculation-based questions in your scratch booklet.
• Topics covered: financial environment and agency theory; time value of money; risk and return (CAPM, beta,
portfolio theory); bond and stock valuation; capital budgeting (NPV, IRR, PI, payback); cost of capital and WACC;
and financial ratio analysis with analytics applications.
• Decision rules to remember: accept projects with NPV > 0; accept projects with IRR > cost of capital; WACC uses
after-tax cost of debt and market-value weights; CAPM required return = rf + β × (E(rm) − rf); Gordon model P0 = D1 /
(r − g) requires g < r.
Section 1: Finance Foundations and Financial Environment
Goals of Financial Management, Agency Theory, & Financial Markets (Q1-Q12)
Q1. The primary goal of financial management in a publicly traded corporation, according to mainstream
corporate finance theory, is to:
A. Maximize the firm's reported earnings per share (EPS) on the annual income statement.
B. Maximize the current market value of the firm's common stock, equivalently shareholder wealth.
[CORRECT]
C. Minimize the firm's weighted average cost of capital in every period regardless of project NPV.
Counts 20% of Course Grade | 100% Verified Correct | Page 1
,MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
D. Maximize total revenue growth to capture market share from competitors.
Correct Answer: B
Rationale:
The accepted goal is shareholder wealth maximization, captured by the current stock price reflecting all expected
future cash flows discounted at the appropriate risk-adjusted rate. Maximizing EPS (A) is flawed because it ignores
risk, timing of cash flows, and dividend policy; EPS can be inflated by share buybacks that destroy value.
Minimizing WACC alone (C) ignores positive-NPV opportunities that may raise WACC but add value. Revenue
growth (D) ignores margins and the cost of capital needed to fund it. Wealth maximization subsumes these by
accounting for cash flow magnitude, timing, and risk simultaneously.
Q2. Which of the following best describes the agency conflict between shareholders and managers in a
modern corporation?
A. Shareholders prefer riskier projects because their liability is limited, while managers prefer safer
projects to protect employment and reputation. [CORRECT]
B. Managers prefer high-risk projects because they share in upside gains, while shareholders prefer lower
risk to preserve capital.
C. Both parties always agree because managerial compensation contracts perfectly align incentives with
shareholder wealth.
D. Shareholders prefer retained earnings to fund growth, while managers prefer to distribute all earnings as
dividends immediately.
Correct Answer: A
Rationale:
Shareholders hold diversified portfolios and benefit from risky positive-NPV projects because their downside is
limited to their equity investment, while upside is unlimited. Managers, whose human capital is concentrated in one
firm, prefer lower risk to protect job security and reputation, even at the cost of forgoing positive-NPV projects.
Choice (B) reverses this relationship. Choice (C) is false because compensation contracts reduce but do not
eliminate the agency conflict. Choice (D) describes a dividend policy disagreement, not the classic risk-taking
agency conflict. Corporate governance mechanisms (boards, compensation, takeovers) exist precisely to mitigate
this divergence.
Q3. An analyst identifies the following four mechanisms that mitigate the agency problem. Which one is
the LEAST effective at disciplining managers who destroy shareholder value?
A. Active takeover market and the threat of hostile acquisition.
B. Compensation contracts tying executive pay to long-run stock performance via restricted stock and
options.
C. Voluntary disclosure of unaudited, non-GAAP pro forma earnings that exceed reported GAAP
earnings. [CORRECT]
D. A well-functioning board of directors with a majority of independent outside directors.
Correct Answer: C
Rationale:
Voluntary non-GAAP pro forma disclosure (C) is largely a marketing tool and is the least effective discipline
mechanism because it is unaudited, selectively constructed, and not tied to governance outcomes. The takeover
market (A) directly displaces underperforming managers and is a powerful external discipline. Performance-tied
compensation (B) aligns managerial incentives with shareholder wealth through stock-based pay with multi-year
Counts 20% of Course Grade | 100% Verified Correct | Page 2
,MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
vesting. An independent board (D) monitors management, controls the audit and compensation committees, and
can replace the CEO. Effective governance relies on (A), (B), and (D); (C) is information manipulation, not
discipline.
Q4. Which of the following transactions occurs in a primary financial market?
A. An investor purchases 1,000 shares of Microsoft on the NASDAQ from another investor through a
broker.
B. A corporation issues $500 million of new 10-year senior unsecured notes through an underwriting
syndicate. [CORRECT]
C. A hedge fund sells short 100,000 shares of Tesla borrowed from its prime broker.
D. A retail investor buys U.S. Treasury bonds from another investor on the secondary bond market.
Correct Answer: B
Rationale:
A primary market transaction is one in which the issuer receives the proceeds from the sale of newly created
securities. The $500 million note issuance (B) is a primary market transaction because the corporation receives the
cash. The NASDAQ share purchase (A), the short sale (C), and the Treasury bond purchase (D) are all secondary
market trades in which investors trade among themselves and the issuer receives no proceeds. Primary markets
channel capital from savers to investing firms; secondary markets provide liquidity and price discovery that
support primary issuance.
Q5. Money market instruments differ from capital market instruments primarily in that money market
instruments:
A. Are equity claims with residual cash flow rights, while capital market instruments are debt claims.
B. Have original maturities of one year or less and are generally low-risk, highly liquid debt
securities. [CORRECT]
C. Are issued only by the U.S. Treasury, while capital market instruments are issued only by private
corporations.
D. Always pay a variable coupon tied to SOFR, while capital market instruments always pay a fixed
coupon.
Correct Answer: B
Rationale:
Money market instruments are short-term (maturity of one year or less), highly liquid, low-default-risk debt claims
such as Treasury bills, commercial paper, bankers' acceptances, and negotiable CDs. Capital market instruments
have maturities exceeding one year (or are perpetual, like common stock) and include long-term bonds, preferred
stock, and common equity. Choice (A) is wrong because money market instruments are debt, not equity. Choice (C)
is wrong because commercial paper and CDs are private money market instruments. Choice (D) is wrong because
coupon type (fixed vs. floating) is not what distinguishes the two markets.
Q6. Which of the following is the best example of a financial intermediary performing the function of
maturity transformation?
A. A commercial bank funds long-term fixed-rate mortgages with short-term demand deposits and
term certificates of deposit. [CORRECT]
B. An investment bank underwrites a new initial public offering for a technology company.
C. A stock exchange provides a continuous auction market for listed common equities.
Counts 20% of Course Grade | 100% Verified Correct | Page 3
, MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
D. A credit rating agency assigns a AAA rating to a newly issued senior secured bond.
Correct Answer: A
Rationale:
Maturity transformation occurs when an intermediary accepts short-term liabilities (e.g., demand deposits) and
uses the proceeds to fund long-term assets (e.g., 30-year mortgages), earning a term premium but bearing liquidity
and interest-rate risk. Choice (A) is the textbook example. Choice (B) is underwriting/information production, not
maturity transformation. Choice (C) is liquidity provision through a secondary market. Choice (D) is information
production by a rating agency. Maturity transformation is one of the three core intermediary functions, alongside
size transformation (pooling small savings) and risk transformation (diversification and screening).
Q7. Stakeholder theory argues that the corporation should consider the interests of all stakeholders, not
just shareholders. Which of the following is the strongest finance-based counterargument for retaining
shareholder wealth maximization as the dominant objective?
A. Shareholders are the only stakeholders who contribute capital to the firm, so other stakeholders are
irrelevant.
B. Shareholder wealth maximization, constrained by legal and contractual obligations to other
stakeholders, provides a clear, measurable objective function and aligns with efficient resource
allocation in capital markets. [CORRECT]
C. Stakeholder theory has been empirically refuted by every major study of corporate performance.
D. Other stakeholders always have written contracts that fully protect them, so they require no additional
consideration.
Correct Answer: B
Rationale:
The standard finance counterargument is that shareholder wealth maximization, subject to legal, contractual, and
regulatory constraints protecting creditors, employees, customers, and the community, provides a clear and
measurable objective that aligns with capital market efficiency and forces managers to weigh all costs and benefits.
Choice (A) overstates the case; other stakeholders do matter and contribute (labor, suppliers, communities).
Choice (C) is false; stakeholder theory is actively debated, not refuted. Choice (D) is incorrect because many
stakeholder claims (e.g., implicit employment promises, environmental externalities) are not fully contracted. The
constrained-optimization framing of (B) preserves operational clarity while addressing stakeholder concerns.
Q8. Which of the following best describes the difference between dealer markets and auction (agency)
markets?
A. In a dealer market, brokers match buy and sell orders at a single price; in an auction market, dealers hold
inventory and quote bid-ask spreads.
B. In an auction market, orders are matched by a broker or exchange on behalf of clients; in a dealer
market, dealers hold inventory and post bid and ask prices at which they buy and sell for their own
account. [CORRECT]
C. Dealer markets trade only bonds, while auction markets trade only stocks.
D. Auction markets always have lower transaction costs than dealer markets because they eliminate the
bid-ask spread.
Correct Answer: B
Rationale:
Counts 20% of Course Grade | 100% Verified Correct | Page 4
MGT 8803 — Business Fundamentals for Analytics
Exam II Finance — Questions and Answers (100% Correct)
Academic Year • Counts 20% of Course Grade
Course MGT 8803 Business Fundamentals for Analytics
Exam Exam II — Finance
Academic Year
Weight 20% of Course Grade
Total Questions 100 multiple-choice (4 options each, one correct)
Time Allotted 180 minutes (suggested)
Cognitive Mix 25% recall, 55% application, 20% analysis
Format 70% application/calculation-based, 30% direct recall
Instructions to the Candidate
• This exam consists of 100 multiple-choice questions organized into 8 sections. Each question carries equal weight;
there is no penalty for incorrect answers, so candidates should attempt every question.
• Each question has exactly one best answer among the four options (A–D). The correct option is marked [CORRECT]
and a detailed rationale follows each question explaining the underlying finance principle, formula application, and
analytics interpretation.
• Calculators (financial or scientific) are permitted. Formula sheets distributed in class may be used. Show all work for
calculation-based questions in your scratch booklet.
• Topics covered: financial environment and agency theory; time value of money; risk and return (CAPM, beta,
portfolio theory); bond and stock valuation; capital budgeting (NPV, IRR, PI, payback); cost of capital and WACC;
and financial ratio analysis with analytics applications.
• Decision rules to remember: accept projects with NPV > 0; accept projects with IRR > cost of capital; WACC uses
after-tax cost of debt and market-value weights; CAPM required return = rf + β × (E(rm) − rf); Gordon model P0 = D1 /
(r − g) requires g < r.
Section 1: Finance Foundations and Financial Environment
Goals of Financial Management, Agency Theory, & Financial Markets (Q1-Q12)
Q1. The primary goal of financial management in a publicly traded corporation, according to mainstream
corporate finance theory, is to:
A. Maximize the firm's reported earnings per share (EPS) on the annual income statement.
B. Maximize the current market value of the firm's common stock, equivalently shareholder wealth.
[CORRECT]
C. Minimize the firm's weighted average cost of capital in every period regardless of project NPV.
Counts 20% of Course Grade | 100% Verified Correct | Page 1
,MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
D. Maximize total revenue growth to capture market share from competitors.
Correct Answer: B
Rationale:
The accepted goal is shareholder wealth maximization, captured by the current stock price reflecting all expected
future cash flows discounted at the appropriate risk-adjusted rate. Maximizing EPS (A) is flawed because it ignores
risk, timing of cash flows, and dividend policy; EPS can be inflated by share buybacks that destroy value.
Minimizing WACC alone (C) ignores positive-NPV opportunities that may raise WACC but add value. Revenue
growth (D) ignores margins and the cost of capital needed to fund it. Wealth maximization subsumes these by
accounting for cash flow magnitude, timing, and risk simultaneously.
Q2. Which of the following best describes the agency conflict between shareholders and managers in a
modern corporation?
A. Shareholders prefer riskier projects because their liability is limited, while managers prefer safer
projects to protect employment and reputation. [CORRECT]
B. Managers prefer high-risk projects because they share in upside gains, while shareholders prefer lower
risk to preserve capital.
C. Both parties always agree because managerial compensation contracts perfectly align incentives with
shareholder wealth.
D. Shareholders prefer retained earnings to fund growth, while managers prefer to distribute all earnings as
dividends immediately.
Correct Answer: A
Rationale:
Shareholders hold diversified portfolios and benefit from risky positive-NPV projects because their downside is
limited to their equity investment, while upside is unlimited. Managers, whose human capital is concentrated in one
firm, prefer lower risk to protect job security and reputation, even at the cost of forgoing positive-NPV projects.
Choice (B) reverses this relationship. Choice (C) is false because compensation contracts reduce but do not
eliminate the agency conflict. Choice (D) describes a dividend policy disagreement, not the classic risk-taking
agency conflict. Corporate governance mechanisms (boards, compensation, takeovers) exist precisely to mitigate
this divergence.
Q3. An analyst identifies the following four mechanisms that mitigate the agency problem. Which one is
the LEAST effective at disciplining managers who destroy shareholder value?
A. Active takeover market and the threat of hostile acquisition.
B. Compensation contracts tying executive pay to long-run stock performance via restricted stock and
options.
C. Voluntary disclosure of unaudited, non-GAAP pro forma earnings that exceed reported GAAP
earnings. [CORRECT]
D. A well-functioning board of directors with a majority of independent outside directors.
Correct Answer: C
Rationale:
Voluntary non-GAAP pro forma disclosure (C) is largely a marketing tool and is the least effective discipline
mechanism because it is unaudited, selectively constructed, and not tied to governance outcomes. The takeover
market (A) directly displaces underperforming managers and is a powerful external discipline. Performance-tied
compensation (B) aligns managerial incentives with shareholder wealth through stock-based pay with multi-year
Counts 20% of Course Grade | 100% Verified Correct | Page 2
,MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
vesting. An independent board (D) monitors management, controls the audit and compensation committees, and
can replace the CEO. Effective governance relies on (A), (B), and (D); (C) is information manipulation, not
discipline.
Q4. Which of the following transactions occurs in a primary financial market?
A. An investor purchases 1,000 shares of Microsoft on the NASDAQ from another investor through a
broker.
B. A corporation issues $500 million of new 10-year senior unsecured notes through an underwriting
syndicate. [CORRECT]
C. A hedge fund sells short 100,000 shares of Tesla borrowed from its prime broker.
D. A retail investor buys U.S. Treasury bonds from another investor on the secondary bond market.
Correct Answer: B
Rationale:
A primary market transaction is one in which the issuer receives the proceeds from the sale of newly created
securities. The $500 million note issuance (B) is a primary market transaction because the corporation receives the
cash. The NASDAQ share purchase (A), the short sale (C), and the Treasury bond purchase (D) are all secondary
market trades in which investors trade among themselves and the issuer receives no proceeds. Primary markets
channel capital from savers to investing firms; secondary markets provide liquidity and price discovery that
support primary issuance.
Q5. Money market instruments differ from capital market instruments primarily in that money market
instruments:
A. Are equity claims with residual cash flow rights, while capital market instruments are debt claims.
B. Have original maturities of one year or less and are generally low-risk, highly liquid debt
securities. [CORRECT]
C. Are issued only by the U.S. Treasury, while capital market instruments are issued only by private
corporations.
D. Always pay a variable coupon tied to SOFR, while capital market instruments always pay a fixed
coupon.
Correct Answer: B
Rationale:
Money market instruments are short-term (maturity of one year or less), highly liquid, low-default-risk debt claims
such as Treasury bills, commercial paper, bankers' acceptances, and negotiable CDs. Capital market instruments
have maturities exceeding one year (or are perpetual, like common stock) and include long-term bonds, preferred
stock, and common equity. Choice (A) is wrong because money market instruments are debt, not equity. Choice (C)
is wrong because commercial paper and CDs are private money market instruments. Choice (D) is wrong because
coupon type (fixed vs. floating) is not what distinguishes the two markets.
Q6. Which of the following is the best example of a financial intermediary performing the function of
maturity transformation?
A. A commercial bank funds long-term fixed-rate mortgages with short-term demand deposits and
term certificates of deposit. [CORRECT]
B. An investment bank underwrites a new initial public offering for a technology company.
C. A stock exchange provides a continuous auction market for listed common equities.
Counts 20% of Course Grade | 100% Verified Correct | Page 3
, MGT 8803 Business Fundamentals for Analytics | Exam II Finance | 2026/2027
D. A credit rating agency assigns a AAA rating to a newly issued senior secured bond.
Correct Answer: A
Rationale:
Maturity transformation occurs when an intermediary accepts short-term liabilities (e.g., demand deposits) and
uses the proceeds to fund long-term assets (e.g., 30-year mortgages), earning a term premium but bearing liquidity
and interest-rate risk. Choice (A) is the textbook example. Choice (B) is underwriting/information production, not
maturity transformation. Choice (C) is liquidity provision through a secondary market. Choice (D) is information
production by a rating agency. Maturity transformation is one of the three core intermediary functions, alongside
size transformation (pooling small savings) and risk transformation (diversification and screening).
Q7. Stakeholder theory argues that the corporation should consider the interests of all stakeholders, not
just shareholders. Which of the following is the strongest finance-based counterargument for retaining
shareholder wealth maximization as the dominant objective?
A. Shareholders are the only stakeholders who contribute capital to the firm, so other stakeholders are
irrelevant.
B. Shareholder wealth maximization, constrained by legal and contractual obligations to other
stakeholders, provides a clear, measurable objective function and aligns with efficient resource
allocation in capital markets. [CORRECT]
C. Stakeholder theory has been empirically refuted by every major study of corporate performance.
D. Other stakeholders always have written contracts that fully protect them, so they require no additional
consideration.
Correct Answer: B
Rationale:
The standard finance counterargument is that shareholder wealth maximization, subject to legal, contractual, and
regulatory constraints protecting creditors, employees, customers, and the community, provides a clear and
measurable objective that aligns with capital market efficiency and forces managers to weigh all costs and benefits.
Choice (A) overstates the case; other stakeholders do matter and contribute (labor, suppliers, communities).
Choice (C) is false; stakeholder theory is actively debated, not refuted. Choice (D) is incorrect because many
stakeholder claims (e.g., implicit employment promises, environmental externalities) are not fully contracted. The
constrained-optimization framing of (B) preserves operational clarity while addressing stakeholder concerns.
Q8. Which of the following best describes the difference between dealer markets and auction (agency)
markets?
A. In a dealer market, brokers match buy and sell orders at a single price; in an auction market, dealers hold
inventory and quote bid-ask spreads.
B. In an auction market, orders are matched by a broker or exchange on behalf of clients; in a dealer
market, dealers hold inventory and post bid and ask prices at which they buy and sell for their own
account. [CORRECT]
C. Dealer markets trade only bonds, while auction markets trade only stocks.
D. Auction markets always have lower transaction costs than dealer markets because they eliminate the
bid-ask spread.
Correct Answer: B
Rationale:
Counts 20% of Course Grade | 100% Verified Correct | Page 4
