FINC 306 FINAL Exam Questions With
100% Correct Answers.
SECTION 1: FINANCIAL MANAGEMENT GOALS
Question 1:
What is the goal of the financial manager?
A) Maximize current profits
B) Minimize operational costs
C) Maximize shareholder wealth
D) Increase market share
Answer: C
Rationale: The primary objective of financial management is to maximize the wealth of
the firm's shareholders . This long-term goal encompasses decisions about investment,
financing, and asset management.
Question 2:
In the agency problem, who is the principal?
A) The financial manager
B) The employee
C) The shareholder
D) The CEO
Answer: C
Rationale: The principal-agent problem arises when the interests of shareholders
(principals) and managers (agents) diverge. Managers may not always act in the best
interest of maximizing shareholder wealth .
,Question 3:
Which of the following is most consistent with shareholder wealth maximization?
A) Accept all projects with positive accounting profits
B) Accept all positive NPV projects
C) Minimize the firm's tax liability
D) Maximize the firm's market share
Answer: B
Rationale: Accepting all positive NPV projects directly increases shareholder wealth by
adding value to the firm. NPV measures the value created by a project in today's
dollars .
SECTION 2: NET PRESENT VALUE (NPV)
Question 4:
Which best describes Net Present Value (NPV)?
A) The total profit of a project
B) The present value of all expected inflows net of the present value of all expected
outflows
C) The future value of all cash flows
D) The total revenue from a project
Answer: B
Rationale: NPV is the present value of all expected cash inflows minus the present value
of all expected cash outflows. It represents the net value added by a project in today's
dollars .
,Question 5:
All else equal, which will result in a LOWER NPV for a normal project?
A) Lower discount rate
B) Higher discount rate
C) Higher cash inflows
D) Lower initial investment
Answer: B
Rationale: A higher discount rate reduces the present value of future cash flows,
resulting in a lower NPV. The discount rate reflects the opportunity cost of capital .
Question 6:
If you are doing an NPV analysis and using the WACC as the discount rate, how do
you account for interest paid to bondholders?
A) Subtract interest from free cash flows
B) Through the cost of debt portion of the WACC
C) Add interest back to the cash flows
D) Ignore interest completely
Answer: B
Rationale: The WACC includes the cost of debt (after-tax) as a component. When using
WACC as the discount rate, interest expense is accounted for through the weighted cost
of capital .
, Question 7:
How should you handle an interest payment on debt when computing incremental
cash flow?
A) Subtract it as an expense
B) Add it back to cash flows
C) Ignore it
D) Multiply it by (1-t)
Answer: C
Rationale: Interest payments are financing costs and are already reflected in the WACC
discount rate. For incremental cash flow analysis, interest should be ignored to avoid
double counting .
Question 8:
How should you handle depreciation when computing incremental cash flow?
A) Ignore it completely
B) Subtract it like on an income statement, but add it back after computing taxes
C) Only consider it if it's a cash expense
D) Add it to cash flows
Answer: B
Rationale: Depreciation is a non-cash expense. It is subtracted to compute taxable
income but added back to calculate actual cash flow because no cash was paid .
Question 9:
What does EBIT stand for?
A) Earnings Before Interest and Taxes
100% Correct Answers.
SECTION 1: FINANCIAL MANAGEMENT GOALS
Question 1:
What is the goal of the financial manager?
A) Maximize current profits
B) Minimize operational costs
C) Maximize shareholder wealth
D) Increase market share
Answer: C
Rationale: The primary objective of financial management is to maximize the wealth of
the firm's shareholders . This long-term goal encompasses decisions about investment,
financing, and asset management.
Question 2:
In the agency problem, who is the principal?
A) The financial manager
B) The employee
C) The shareholder
D) The CEO
Answer: C
Rationale: The principal-agent problem arises when the interests of shareholders
(principals) and managers (agents) diverge. Managers may not always act in the best
interest of maximizing shareholder wealth .
,Question 3:
Which of the following is most consistent with shareholder wealth maximization?
A) Accept all projects with positive accounting profits
B) Accept all positive NPV projects
C) Minimize the firm's tax liability
D) Maximize the firm's market share
Answer: B
Rationale: Accepting all positive NPV projects directly increases shareholder wealth by
adding value to the firm. NPV measures the value created by a project in today's
dollars .
SECTION 2: NET PRESENT VALUE (NPV)
Question 4:
Which best describes Net Present Value (NPV)?
A) The total profit of a project
B) The present value of all expected inflows net of the present value of all expected
outflows
C) The future value of all cash flows
D) The total revenue from a project
Answer: B
Rationale: NPV is the present value of all expected cash inflows minus the present value
of all expected cash outflows. It represents the net value added by a project in today's
dollars .
,Question 5:
All else equal, which will result in a LOWER NPV for a normal project?
A) Lower discount rate
B) Higher discount rate
C) Higher cash inflows
D) Lower initial investment
Answer: B
Rationale: A higher discount rate reduces the present value of future cash flows,
resulting in a lower NPV. The discount rate reflects the opportunity cost of capital .
Question 6:
If you are doing an NPV analysis and using the WACC as the discount rate, how do
you account for interest paid to bondholders?
A) Subtract interest from free cash flows
B) Through the cost of debt portion of the WACC
C) Add interest back to the cash flows
D) Ignore interest completely
Answer: B
Rationale: The WACC includes the cost of debt (after-tax) as a component. When using
WACC as the discount rate, interest expense is accounted for through the weighted cost
of capital .
, Question 7:
How should you handle an interest payment on debt when computing incremental
cash flow?
A) Subtract it as an expense
B) Add it back to cash flows
C) Ignore it
D) Multiply it by (1-t)
Answer: C
Rationale: Interest payments are financing costs and are already reflected in the WACC
discount rate. For incremental cash flow analysis, interest should be ignored to avoid
double counting .
Question 8:
How should you handle depreciation when computing incremental cash flow?
A) Ignore it completely
B) Subtract it like on an income statement, but add it back after computing taxes
C) Only consider it if it's a cash expense
D) Add it to cash flows
Answer: B
Rationale: Depreciation is a non-cash expense. It is subtracted to compute taxable
income but added back to calculate actual cash flow because no cash was paid .
Question 9:
What does EBIT stand for?
A) Earnings Before Interest and Taxes
