BUS350
Principles of Finance
LATEST MIDTERM REVIEW
© 2024/2025
,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximizing shareholder wealth
b) Minimizing risk
c) Maximizing profits
d) Maintaining steady growth
Correct Answer: a) Maximizing shareholder wealth
Rationale: The primary goal is to maximize the value of the
company for its shareholders.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for future cash flows to account for risk.
Correct Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM calculates the expected return on an
investment and is used for pricing risky securities.
3. True/False: The Efficient Market Hypothesis implies that all
stocks are fairly priced at all times.
Correct Answer: True
© 2024/2025
, Rationale: According to the Efficient Market Hypothesis, it's
impossible to "beat the market" because stock market efficiency
causes existing share prices to always incorporate and reflect all
relevant information.
4. Multiple Response: Which of the following are considered
advantages of the Net Present Value (NPV) method?
a) Time value of money is considered
b) Provides a clear measure of profitability
c) Easy to understand and compute
d) Accounts for risk and uncertainty
Correct Answers: a) Time value of money is considered, b)
Provides a clear measure of profitability, d) Accounts for risk and
uncertainty
Rationale: NPV is a comprehensive measure that includes the
time value of money and can incorporate adjustments for risk and
uncertainty, unlike the payback period which is simpler but less
informative.
5. Multiple Choice: In the context of capital budgeting, what does
the term 'sunk cost' refer to?
a) Costs that have already been incurred and cannot be recovered
b) The cost of new capital
c) The minimum required return on a new investment
© 2024/2025
Principles of Finance
LATEST MIDTERM REVIEW
© 2024/2025
,1. Multiple Choice: What is the primary goal of financial
management?
a) Maximizing shareholder wealth
b) Minimizing risk
c) Maximizing profits
d) Maintaining steady growth
Correct Answer: a) Maximizing shareholder wealth
Rationale: The primary goal is to maximize the value of the
company for its shareholders.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for future cash flows to account for risk.
Correct Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM calculates the expected return on an
investment and is used for pricing risky securities.
3. True/False: The Efficient Market Hypothesis implies that all
stocks are fairly priced at all times.
Correct Answer: True
© 2024/2025
, Rationale: According to the Efficient Market Hypothesis, it's
impossible to "beat the market" because stock market efficiency
causes existing share prices to always incorporate and reflect all
relevant information.
4. Multiple Response: Which of the following are considered
advantages of the Net Present Value (NPV) method?
a) Time value of money is considered
b) Provides a clear measure of profitability
c) Easy to understand and compute
d) Accounts for risk and uncertainty
Correct Answers: a) Time value of money is considered, b)
Provides a clear measure of profitability, d) Accounts for risk and
uncertainty
Rationale: NPV is a comprehensive measure that includes the
time value of money and can incorporate adjustments for risk and
uncertainty, unlike the payback period which is simpler but less
informative.
5. Multiple Choice: In the context of capital budgeting, what does
the term 'sunk cost' refer to?
a) Costs that have already been incurred and cannot be recovered
b) The cost of new capital
c) The minimum required return on a new investment
© 2024/2025
