FIN 300 FINAL EXAM QUESTIONS
AND ANSWERS ALL CORRECT
What does Beta measure? - Answer- Sensitivity of a stock's returns to market returns
(systematic risk).
What does CAPM say about Beta and expected return? - Answer- Higher Beta →
higher expected return.
Which types of stocks have high Betas? - Answer- Cyclical, economically sensitive
stocks.
Three funding sources firms use? - Answer- Debt, equity, preferred stock.
In WACC, do we use market or book values? - Answer- Market values.
Why does debt have a tax advantage? - Answer- Interest is tax-deductible.
When is WACC the correct discount rate? - Answer- For projects with similar risk to the
firm's existing operations.
What is NPV? - Answer- Present value of cash inflows minus outflows.
Meaning of positive NPV? - Answer- Project adds value; accept it.
What is capital structure? - Answer- Mix of debt and equity financing.
What is leverage? - Answer- Use of debt financing.
Effect of leverage on cost of equity? - Answer- Increases cost of equity as equity
becomes riskier.
How do firms set capital structure? - Answer- Balance between risk, return, and cost of
capital.
How does inflation affect purchasing power? - Answer- Reduces it over time.
What are retirement accounts? - Answer- Tax-advantaged accounts for long-term
saving.
AND ANSWERS ALL CORRECT
What does Beta measure? - Answer- Sensitivity of a stock's returns to market returns
(systematic risk).
What does CAPM say about Beta and expected return? - Answer- Higher Beta →
higher expected return.
Which types of stocks have high Betas? - Answer- Cyclical, economically sensitive
stocks.
Three funding sources firms use? - Answer- Debt, equity, preferred stock.
In WACC, do we use market or book values? - Answer- Market values.
Why does debt have a tax advantage? - Answer- Interest is tax-deductible.
When is WACC the correct discount rate? - Answer- For projects with similar risk to the
firm's existing operations.
What is NPV? - Answer- Present value of cash inflows minus outflows.
Meaning of positive NPV? - Answer- Project adds value; accept it.
What is capital structure? - Answer- Mix of debt and equity financing.
What is leverage? - Answer- Use of debt financing.
Effect of leverage on cost of equity? - Answer- Increases cost of equity as equity
becomes riskier.
How do firms set capital structure? - Answer- Balance between risk, return, and cost of
capital.
How does inflation affect purchasing power? - Answer- Reduces it over time.
What are retirement accounts? - Answer- Tax-advantaged accounts for long-term
saving.
