BUS524
Corporate Finance & Accounting
Midterms Exam Review (Qns & Ans)
2025
1. **Which of the following is NOT a component of the
Weighted Average Cost of Capital (WACC)?*
- A. Cost of debt
- B. Cost of equity
- C. Depreciation expenses
- D. Proportion of equity and debt in the capital structure
**ANS:* C
**Rationale:* WACC includes the cost of debt, cost of equity,
and their relative proportions in financing but not non-cash
accounting items like depreciation.
©2025
,2. **What does the Modigliani-Miller Proposition II state in the
presence of taxes?*
- A. Capital structure is irrelevant.
- B. Leverage decreases the cost of equity.
- C. Leverage increases the cost of equity.
- D. Dividend policy is irrelevant.
**ANS:* C
**Rationale:* Modigliani-Miller Proposition II states that the
cost of equity increases with financial leverage due to the
additional risk borne by shareholders.
3. **Which method is most commonly used to value a firm with
stable cash flows?*
- A. Market capitalization
- B. Dividend Discount Model (DDM)
- C. Free Cash Flow to Firm (FCFF)
- D. Comparable company analysis
**ANS:* C
**Rationale:* FCFF is an effective valuation method for firms
with predictable, stable cash flows.
©2025
, 4. **Which ratio measures a firm's ability to cover its interest
payments?*
- A. Quick ratio
- B. Times interest earned (TIE) ratio
- C. Debt-to-equity ratio
- D. Current ratio
**ANS:* B
**Rationale:* The TIE ratio assesses how easily a firm can
meet its interest obligations using earnings before interest and
taxes (EBIT).
5. **In capital budgeting, the Internal Rate of Return (IRR) is the
discount rate at which:*
- A. Net present value (NPV) equals zero
- B. NPV is maximized
- C. Payback period equals the project life
- D. Weighted Average Cost of Capital (WACC) is minimized
**ANS:* A
**Rationale:* The IRR is the discount rate that makes the NPV
of a project exactly zero.
---
©2025
Corporate Finance & Accounting
Midterms Exam Review (Qns & Ans)
2025
1. **Which of the following is NOT a component of the
Weighted Average Cost of Capital (WACC)?*
- A. Cost of debt
- B. Cost of equity
- C. Depreciation expenses
- D. Proportion of equity and debt in the capital structure
**ANS:* C
**Rationale:* WACC includes the cost of debt, cost of equity,
and their relative proportions in financing but not non-cash
accounting items like depreciation.
©2025
,2. **What does the Modigliani-Miller Proposition II state in the
presence of taxes?*
- A. Capital structure is irrelevant.
- B. Leverage decreases the cost of equity.
- C. Leverage increases the cost of equity.
- D. Dividend policy is irrelevant.
**ANS:* C
**Rationale:* Modigliani-Miller Proposition II states that the
cost of equity increases with financial leverage due to the
additional risk borne by shareholders.
3. **Which method is most commonly used to value a firm with
stable cash flows?*
- A. Market capitalization
- B. Dividend Discount Model (DDM)
- C. Free Cash Flow to Firm (FCFF)
- D. Comparable company analysis
**ANS:* C
**Rationale:* FCFF is an effective valuation method for firms
with predictable, stable cash flows.
©2025
, 4. **Which ratio measures a firm's ability to cover its interest
payments?*
- A. Quick ratio
- B. Times interest earned (TIE) ratio
- C. Debt-to-equity ratio
- D. Current ratio
**ANS:* B
**Rationale:* The TIE ratio assesses how easily a firm can
meet its interest obligations using earnings before interest and
taxes (EBIT).
5. **In capital budgeting, the Internal Rate of Return (IRR) is the
discount rate at which:*
- A. Net present value (NPV) equals zero
- B. NPV is maximized
- C. Payback period equals the project life
- D. Weighted Average Cost of Capital (WACC) is minimized
**ANS:* A
**Rationale:* The IRR is the discount rate that makes the NPV
of a project exactly zero.
---
©2025
