BU.920.604
Finance
Final Exam Review
(With Solutions)
2025
1
,1. A CFO evaluates two mutually exclusive projects: Project X has an NPV
of \$4 million but an IRR of 12%, Project Y has an NPV of \$3 million but
an IRR of 15%. The firm’s cost of capital is 10%. Which project should the
CFO select and why?
A. Project X, because it maximizes value added
B. Project Y, because it has a higher IRR
C. Either, since both NPVs are positive
D. Neither, because IRRs conflict
Correct ANS: A. Project X, because it maximizes value added
Rationale: NPV directly measures value creation; even though Project
Y has a higher IRR, Project X yields a larger dollar increase in firm value.
2. A treasury manager enters into a receive-fixed, pay-floating interest
rate swap on \$100 million notional to convert floating-rate debt to fixed.
If LIBOR rises, which net cash flow effect results?
A. Pay more on swap, net floating cost increases
B. Gain on swap offsets higher floating debt payments
C. No effect, swap and debt perfectly offset
D. Swap fixed leg floats, increasing both payments
Correct ANS: B. Gain on swap offsets higher floating debt payments
Rationale: In a receive-fixed swap, when floating rates rise, the
manager pays higher floating to the bank but receives fixed; net swap
receipts cushion the increased debt interest.
3. A portfolio manager uses the Black–Scholes model to value a European
call on a stock trading at \$50 with strike \$55. If implied volatility
increases from 20% to 30%, what happens to the call price?
A. It decreases, due to higher time value decay
B. It remains unchanged, volatility cancels out
2
, C. It increases, reflecting greater option premium
D. It becomes negative if volatility is too high
Correct ANS: C. It increases, reflecting greater option premium
Rationale: Higher volatility raises the probability of upside payoff,
boosting the call’s time value and price.
4. A leveraged buyout model assumes an exit EBITDA multiple of 8× and
internal rate of return (IRR) of 22%. If the exit multiple falls to 6× all else
equal, the IRR will:
A. Increase, since lower multiple reduces debt burden
B. Decrease, due to lower exit proceeds
C. Remain unchanged, IRR independent of exit multiple
D. Fluctuate unpredictably
Correct ANS: B. Decrease, due to lower exit proceeds
Rationale: Lower exit multiple reduces sale price, diminishing cash
proceeds to equity holders, thereby lowering IRR.
5. A corporate treasurer hedges a €20 million receivable due in 6 months
using a forward contract. The forward rate is \$1.10/€. Which amount in
dollars will be realized?
A. \$18.2 million
B. \$20 million
C. \$22 million
D. Depends on spot rate at maturity
Correct ANS: C. \$22 million
Rationale: Forward contract locks in \$1.10 per euro, so €20 million ×
\$1.10/€ = \$22 million regardless of spot movement.
6. A finance executive applies the Modigliani–Miller Proposition II (with
3
Finance
Final Exam Review
(With Solutions)
2025
1
,1. A CFO evaluates two mutually exclusive projects: Project X has an NPV
of \$4 million but an IRR of 12%, Project Y has an NPV of \$3 million but
an IRR of 15%. The firm’s cost of capital is 10%. Which project should the
CFO select and why?
A. Project X, because it maximizes value added
B. Project Y, because it has a higher IRR
C. Either, since both NPVs are positive
D. Neither, because IRRs conflict
Correct ANS: A. Project X, because it maximizes value added
Rationale: NPV directly measures value creation; even though Project
Y has a higher IRR, Project X yields a larger dollar increase in firm value.
2. A treasury manager enters into a receive-fixed, pay-floating interest
rate swap on \$100 million notional to convert floating-rate debt to fixed.
If LIBOR rises, which net cash flow effect results?
A. Pay more on swap, net floating cost increases
B. Gain on swap offsets higher floating debt payments
C. No effect, swap and debt perfectly offset
D. Swap fixed leg floats, increasing both payments
Correct ANS: B. Gain on swap offsets higher floating debt payments
Rationale: In a receive-fixed swap, when floating rates rise, the
manager pays higher floating to the bank but receives fixed; net swap
receipts cushion the increased debt interest.
3. A portfolio manager uses the Black–Scholes model to value a European
call on a stock trading at \$50 with strike \$55. If implied volatility
increases from 20% to 30%, what happens to the call price?
A. It decreases, due to higher time value decay
B. It remains unchanged, volatility cancels out
2
, C. It increases, reflecting greater option premium
D. It becomes negative if volatility is too high
Correct ANS: C. It increases, reflecting greater option premium
Rationale: Higher volatility raises the probability of upside payoff,
boosting the call’s time value and price.
4. A leveraged buyout model assumes an exit EBITDA multiple of 8× and
internal rate of return (IRR) of 22%. If the exit multiple falls to 6× all else
equal, the IRR will:
A. Increase, since lower multiple reduces debt burden
B. Decrease, due to lower exit proceeds
C. Remain unchanged, IRR independent of exit multiple
D. Fluctuate unpredictably
Correct ANS: B. Decrease, due to lower exit proceeds
Rationale: Lower exit multiple reduces sale price, diminishing cash
proceeds to equity holders, thereby lowering IRR.
5. A corporate treasurer hedges a €20 million receivable due in 6 months
using a forward contract. The forward rate is \$1.10/€. Which amount in
dollars will be realized?
A. \$18.2 million
B. \$20 million
C. \$22 million
D. Depends on spot rate at maturity
Correct ANS: C. \$22 million
Rationale: Forward contract locks in \$1.10 per euro, so €20 million ×
\$1.10/€ = \$22 million regardless of spot movement.
6. A finance executive applies the Modigliani–Miller Proposition II (with
3
