FIN 300 FINAL EXAM PART 5 -
ADVANCED CORPORATE FINANCE |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. When evaluating a project with a different life than an existing alternative, which method
is superior for comparing the two projects?
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Equivalent Annual Annuity (EAA)
D. Profitability Index (PI)
Answer: C
Conceptual Explanation: EAA converts the NPV of projects with unequal lives into a
constant annual cash flow, allowing for a direct comparison on an annualized basis.
2. According to the Modigliani-Miller Proposition II with corporate taxes, as a firm increases
its leverage, what happens to the cost of equity?
A. It remains constant.
B. It increases linearly with the debt-to-equity ratio.
C. It decreases due to the tax shield.
,D. It increases at a decreasing rate.
Answer: B
Conceptual Explanation: M&M Prop II states that the cost of equity increases as the firm
uses more debt because the risk to equity holders increases, though the tax shield lowers
the overall WACC.
3. Which of the following describes the ‘Signaling Hypothesis’ regarding dividend policy?
A. Dividends are irrelevant to firm value.
B. Firms should only pay dividends after all positive NPV projects are funded.
C. Investors prefer dividends over capital gains due to tax advantages.
D. Management uses dividend changes to communicate future prospects to investors.
Answer: D
Conceptual Explanation: The signaling hypothesis suggests that because managers have
asymmetric information, a dividend increase is a ‘signal’ of confidence in future earnings.
4. In the context of capital budgeting, what is the ‘Pure Play’ method used for?
A. To calculate the internal rate of return for a risky project.
B. To estimate the beta of a specific project by using the beta of a specialized firm in that
industry.
C. To determine the optimal capital structure for a diversified conglomerate.
D. To evaluate projects that have no salvage value.
, Answer: B
Conceptual Explanation: The pure-play method involves finding a public company that is
exclusively in the same line of business as the project and using its beta to estimate the
project’s risk.
5. How does an increase in the marginal tax rate affect a firm’s Weighted Average Cost of
Capital (WACC), ceteris paribus?
A. It increases the WACC.
B. It decreases the WACC.
C. It has no effect on WACC.
D. It increases the cost of equity, thereby increasing WACC.
Answer: B
Conceptual Explanation: Since the cost of debt is calculated after-tax [Rd * (1-T)], a higher
tax rate increases the tax shield, lowering the effective cost of debt and the overall WACC.
6. Which type of real option allows a manager to shut down a project if the cash flows are
lower than expected?
A. Abandonment option
B. Flexibility option
C. Expansion option
D. Timing option
ADVANCED CORPORATE FINANCE |
QUESTIONS AND ANSWERS |2026/2027
UPDATE | JUST RELEASED
1. When evaluating a project with a different life than an existing alternative, which method
is superior for comparing the two projects?
A. Net Present Value (NPV)
B. Internal Rate of Return (IRR)
C. Equivalent Annual Annuity (EAA)
D. Profitability Index (PI)
Answer: C
Conceptual Explanation: EAA converts the NPV of projects with unequal lives into a
constant annual cash flow, allowing for a direct comparison on an annualized basis.
2. According to the Modigliani-Miller Proposition II with corporate taxes, as a firm increases
its leverage, what happens to the cost of equity?
A. It remains constant.
B. It increases linearly with the debt-to-equity ratio.
C. It decreases due to the tax shield.
,D. It increases at a decreasing rate.
Answer: B
Conceptual Explanation: M&M Prop II states that the cost of equity increases as the firm
uses more debt because the risk to equity holders increases, though the tax shield lowers
the overall WACC.
3. Which of the following describes the ‘Signaling Hypothesis’ regarding dividend policy?
A. Dividends are irrelevant to firm value.
B. Firms should only pay dividends after all positive NPV projects are funded.
C. Investors prefer dividends over capital gains due to tax advantages.
D. Management uses dividend changes to communicate future prospects to investors.
Answer: D
Conceptual Explanation: The signaling hypothesis suggests that because managers have
asymmetric information, a dividend increase is a ‘signal’ of confidence in future earnings.
4. In the context of capital budgeting, what is the ‘Pure Play’ method used for?
A. To calculate the internal rate of return for a risky project.
B. To estimate the beta of a specific project by using the beta of a specialized firm in that
industry.
C. To determine the optimal capital structure for a diversified conglomerate.
D. To evaluate projects that have no salvage value.
, Answer: B
Conceptual Explanation: The pure-play method involves finding a public company that is
exclusively in the same line of business as the project and using its beta to estimate the
project’s risk.
5. How does an increase in the marginal tax rate affect a firm’s Weighted Average Cost of
Capital (WACC), ceteris paribus?
A. It increases the WACC.
B. It decreases the WACC.
C. It has no effect on WACC.
D. It increases the cost of equity, thereby increasing WACC.
Answer: B
Conceptual Explanation: Since the cost of debt is calculated after-tax [Rd * (1-T)], a higher
tax rate increases the tax shield, lowering the effective cost of debt and the overall WACC.
6. Which type of real option allows a manager to shut down a project if the cash flows are
lower than expected?
A. Abandonment option
B. Flexibility option
C. Expansion option
D. Timing option
