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Financial Management & Investment
“
Analysis: 250 Exam Questions with Detailed
Solutions.
Features:
● 250 exam-focused questions WITH detailed Workouts
● Detailed, step-by-step solution walkthroughs
● Clear formatting for easy study and revision
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Master Key Concepts of NPV, IRR, WACC, Bonds, Capital Budgeting, and
Financial Ratios
1. What is the net present value (NPV) of a project that requires an initial investment of
$100,000 and returns $30,000 annually for 5 years, assuming a discount rate of 10%?
A) $13,745
B) $15,867
C) $19,678
D) $17,420
The correct answer is: C) $19,678
Solution:
We use the NPV formula:
NPV = -Initial Investment + \u03a3 (Cash Flow / (1 + r)^t)
Where: r = 0.10, Cash Flow = $30,000 each year for 5 years.
NPV = -100,000 + 30,000/(1.1)^1 + 30,000/(1.1)^2 + 30,000/(1.1)^3 + 30,000/(1.1)^4 +
30,000/(1.1)^5
NPV = -100,000 + 27,273 + 24,793 + 22,539 + 20,490 + 18,627 = $19,678
2. If a project has a profitability index (PI) of 1.25, what does it mean?
A) The project has a negative NPV
B) The return is less than the cost
C) For every $1 invested, $1.25 is returned
D) The IRR is less than the cost of capital
The correct answer is: C) For every $1 invested, $1.25 is returned
Solution:
Profitability Index = Present Value of Future Cash Flows / Initial Investment
So, PI of 1.25 means every dollar invested returns $1.25 (includes the original $1 and $0.25
profit).
3. Which of the following best describes the internal rate of return (IRR)?
A) The rate that minimizes NPV
B) The weighted average cost of capital
C) The discount rate that makes NPV = 0
D) The same as the hurdle rate
The correct answer is: C) The discount rate that makes NPV = 0
Solution:
IRR is the rate where the present value of cash inflows equals the initial investment, making
NPV zero.
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4. If the weighted average cost of capital (WACC) is 8%, and a project earns 10%, what is
the economic value added (EVA)?
A) Positive
B) Zero
C) Positive, since return > WACC
D) Negative
The correct answer is: C) Positive, since return > WACC
Solution:
EVA = Return - WACC. Since 10% > 8%, EVA is positive. This means the project is adding
value over its cost of capital.
5. What is the payback period for a $50,000 investment with annual returns of $10,000?
A) 3 years
B) 5 years
C) 7 years
D) 10 years
The correct answer is: B) 5 years
Solution:
Payback Period = Initial Investment / Annual Cash Flow
= $50,000 / $10,000 = 5 years
6. Which of the following is an assumption of the DCF model?
A) Cash flows are constant
B) Interest rate is zero
C) Future cash flows can be estimated and discounted to present
D) Projects are not risky
The correct answer is: C) Future cash flows can be estimated and discounted to present
Solution:
The Discounted Cash Flow (DCF) model assumes future cash flows can be predicted and
brought to present using a discount rate.
7. What is the formula for calculating WACC?
A) (Debt + Equity) / Total Assets
B) Equity / Total Capital
C) (E/V) * Re + (D/V) * Rd * (1-T)
D) Re + Rd
The correct answer is: C) (E/V) * Re + (D/V) * Rd * (1-T)
Solution:
WACC = (Proportion of Equity * Cost of Equity) + (Proportion of Debt * Cost of Debt * (1 -
Tax Rate))
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Where:
E = Equity, D = Debt, V = E + D, Re = Cost of Equity, Rd = Cost of Debt
8. Which of the following is most sensitive to changes in discount rate?
A) IRR
B) NPV
C) Payback Period
D) EVA
The correct answer is: B) NPV
Solution:
NPV is calculated using the discount rate. If the discount rate changes, the value of future cash
flows also changes.
9. If a company’s beta is 1.2, risk-free rate is 3%, and market return is 10%, what is the
cost of equity using CAPM?
A) 10.4%
B) 11.0%
C) 11.4%
D) 12.0%
The correct answer is: C) 11.4%
Solution:
CAPM formula = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate)
= 3% + 1.2 × (10% – 3%) = 3% + 1.2 × 7% = 3% + 8.4% = 11.4%
10. What does a high debt-to-equity ratio indicate?
A) Low leverage
B) Strong equity financing
C) High reliance on debt
D) Strong liquidity
The correct answer is: C) High reliance on debt
Solution:
Debt-to-equity ratio = Total Debt / Total Equity
A high number means the company uses more borrowed money than owner’s equity to finance
its operations.
11. If a company uses straight-line depreciation for a 5-year asset with no salvage value and
CapEx of $25,000, what is annual depreciation?
A) $6,250
B) $4,000
C) $5,000
D) $5,500
Financial Management & Investment
“
Analysis: 250 Exam Questions with Detailed
Solutions.
Features:
● 250 exam-focused questions WITH detailed Workouts
● Detailed, step-by-step solution walkthroughs
● Clear formatting for easy study and revision
, 2
Master Key Concepts of NPV, IRR, WACC, Bonds, Capital Budgeting, and
Financial Ratios
1. What is the net present value (NPV) of a project that requires an initial investment of
$100,000 and returns $30,000 annually for 5 years, assuming a discount rate of 10%?
A) $13,745
B) $15,867
C) $19,678
D) $17,420
The correct answer is: C) $19,678
Solution:
We use the NPV formula:
NPV = -Initial Investment + \u03a3 (Cash Flow / (1 + r)^t)
Where: r = 0.10, Cash Flow = $30,000 each year for 5 years.
NPV = -100,000 + 30,000/(1.1)^1 + 30,000/(1.1)^2 + 30,000/(1.1)^3 + 30,000/(1.1)^4 +
30,000/(1.1)^5
NPV = -100,000 + 27,273 + 24,793 + 22,539 + 20,490 + 18,627 = $19,678
2. If a project has a profitability index (PI) of 1.25, what does it mean?
A) The project has a negative NPV
B) The return is less than the cost
C) For every $1 invested, $1.25 is returned
D) The IRR is less than the cost of capital
The correct answer is: C) For every $1 invested, $1.25 is returned
Solution:
Profitability Index = Present Value of Future Cash Flows / Initial Investment
So, PI of 1.25 means every dollar invested returns $1.25 (includes the original $1 and $0.25
profit).
3. Which of the following best describes the internal rate of return (IRR)?
A) The rate that minimizes NPV
B) The weighted average cost of capital
C) The discount rate that makes NPV = 0
D) The same as the hurdle rate
The correct answer is: C) The discount rate that makes NPV = 0
Solution:
IRR is the rate where the present value of cash inflows equals the initial investment, making
NPV zero.
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4. If the weighted average cost of capital (WACC) is 8%, and a project earns 10%, what is
the economic value added (EVA)?
A) Positive
B) Zero
C) Positive, since return > WACC
D) Negative
The correct answer is: C) Positive, since return > WACC
Solution:
EVA = Return - WACC. Since 10% > 8%, EVA is positive. This means the project is adding
value over its cost of capital.
5. What is the payback period for a $50,000 investment with annual returns of $10,000?
A) 3 years
B) 5 years
C) 7 years
D) 10 years
The correct answer is: B) 5 years
Solution:
Payback Period = Initial Investment / Annual Cash Flow
= $50,000 / $10,000 = 5 years
6. Which of the following is an assumption of the DCF model?
A) Cash flows are constant
B) Interest rate is zero
C) Future cash flows can be estimated and discounted to present
D) Projects are not risky
The correct answer is: C) Future cash flows can be estimated and discounted to present
Solution:
The Discounted Cash Flow (DCF) model assumes future cash flows can be predicted and
brought to present using a discount rate.
7. What is the formula for calculating WACC?
A) (Debt + Equity) / Total Assets
B) Equity / Total Capital
C) (E/V) * Re + (D/V) * Rd * (1-T)
D) Re + Rd
The correct answer is: C) (E/V) * Re + (D/V) * Rd * (1-T)
Solution:
WACC = (Proportion of Equity * Cost of Equity) + (Proportion of Debt * Cost of Debt * (1 -
Tax Rate))
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Where:
E = Equity, D = Debt, V = E + D, Re = Cost of Equity, Rd = Cost of Debt
8. Which of the following is most sensitive to changes in discount rate?
A) IRR
B) NPV
C) Payback Period
D) EVA
The correct answer is: B) NPV
Solution:
NPV is calculated using the discount rate. If the discount rate changes, the value of future cash
flows also changes.
9. If a company’s beta is 1.2, risk-free rate is 3%, and market return is 10%, what is the
cost of equity using CAPM?
A) 10.4%
B) 11.0%
C) 11.4%
D) 12.0%
The correct answer is: C) 11.4%
Solution:
CAPM formula = Risk-Free Rate + Beta * (Market Return – Risk-Free Rate)
= 3% + 1.2 × (10% – 3%) = 3% + 1.2 × 7% = 3% + 8.4% = 11.4%
10. What does a high debt-to-equity ratio indicate?
A) Low leverage
B) Strong equity financing
C) High reliance on debt
D) Strong liquidity
The correct answer is: C) High reliance on debt
Solution:
Debt-to-equity ratio = Total Debt / Total Equity
A high number means the company uses more borrowed money than owner’s equity to finance
its operations.
11. If a company uses straight-line depreciation for a 5-year asset with no salvage value and
CapEx of $25,000, what is annual depreciation?
A) $6,250
B) $4,000
C) $5,000
D) $5,500
