FIN 260 FINAL EXAM QUESTIONS
AND ANSWERS ALL CORRECT
2026 LATEST UPDATE
When a manager develops a cost of capital for a specific project based on the cost of
capital for another firm that has a similar line of business as the project, the manager is
utilizing the ________ approach.
A) Subjective risk.
B) Capital adjustment.
C) Divisional cost of capital.
D) Pure play.
E) Security market line. - Answer- D) Pure play.
Assigning discount rates to individual projects based on the risk level of each project:
A) Decreases the value of the firm over time.
B) Will prevent the firm's overall cost of capital from changing over time.
C) May cause the firm's overall weighted average cost of capital to either increase or
decrease over time.
D) Negates the firm's goal of creating the most value for the shareholders.
E) Will cause the firm's overall cost of capital to decrease over time. - Answer- C) May
cause the firm's overall weighted average cost of capital to either increase or decrease
over time.
The capital structure weights used in computing a firm's weighted average cost of
capital:
A) Are based on the market values of the firm's debt and equity securities.
B) Are restricted to the firm's debt and common stock.
C) Remain constant over time unless the firm issues new securities.
D) Depend upon the financing obtained to fund each specific project.
E) Are based on the book values of the firm's debt and equity. - Answer- A) Are based
on the market values of the firm's debt and equity securities.
Which one of the following statements is correct?
A) Firms will correctly accept or reject every project if they adopt the subjective
approach.
B) The pure play approach should only be used with low-risk projects.
C) The subjective approach assesses the risks of each project and assigns an
adjustment factor that is unique just for that project.
, D) Mandatory projects should only be accepted if they produce a positive NPV when the
firm's WACC is used as the discount rate.
E) Overall, a firm makes better decisions when it uses the subjective approach than
when it uses its WACC as the discount rate for all projects. - Answer- E) Overall, a firm
makes better decisions when it uses the subjective approach than when it uses its
WACC as the discount rate for all projects.
Why does the tax amount need adjusted when valuing a firm using the cash flow from
assets approach?
A) Only straight-linedepreciation can be used when computing taxes for valuation
purposes.
B) The tax effect of the interest expense must be removed.
C) The taxes must be computed for valuation purposes based on the average tax rate
for the past 10 years.
D) The tax effect of the dividend payments must be eliminated.
E) Taxes must be computed for valuation purposes based solely on the marginal tax
rate. - Answer- B) The tax effect of the interest expense must be removed.
The discount rate assigned to an individual project should be based on the:
A) Firm's weighted average cost of capital.
B) Average of the firm's overall cost of capital for the past five years.
C) Current risk level of the overall firm.
D) Risks associated with the use of the funds required by the project.
E) Actual sources of funding used for the project. - Answer- D) Risks associated with
the use of the funds required by the project.
You are viewing a graph that plots the NPVs of a project to various discount rates that
could be applied to the project's cash flows. What is the name given to this graph?
A) Present value sequence.
B) NPV route.
C) NPV profile.
D) Project tract.
E) Projected risk profile. - Answer- C) NPV profile.
The IRR that causes the net present value of the differences between two project's cash
flows to equal zero is called the:
A) Present value rate.
B) Zero-sum rate.
C) Break-even rate.
D) Required return.
E) Crossover rate. - Answer- E) Crossover rate.
A project has a net present value of zero. Which one of the following best describes this
project?
A) The project's cash inflows equal its cash outflows in current dollar terms.
B) The project has a zero percent rate of return.
AND ANSWERS ALL CORRECT
2026 LATEST UPDATE
When a manager develops a cost of capital for a specific project based on the cost of
capital for another firm that has a similar line of business as the project, the manager is
utilizing the ________ approach.
A) Subjective risk.
B) Capital adjustment.
C) Divisional cost of capital.
D) Pure play.
E) Security market line. - Answer- D) Pure play.
Assigning discount rates to individual projects based on the risk level of each project:
A) Decreases the value of the firm over time.
B) Will prevent the firm's overall cost of capital from changing over time.
C) May cause the firm's overall weighted average cost of capital to either increase or
decrease over time.
D) Negates the firm's goal of creating the most value for the shareholders.
E) Will cause the firm's overall cost of capital to decrease over time. - Answer- C) May
cause the firm's overall weighted average cost of capital to either increase or decrease
over time.
The capital structure weights used in computing a firm's weighted average cost of
capital:
A) Are based on the market values of the firm's debt and equity securities.
B) Are restricted to the firm's debt and common stock.
C) Remain constant over time unless the firm issues new securities.
D) Depend upon the financing obtained to fund each specific project.
E) Are based on the book values of the firm's debt and equity. - Answer- A) Are based
on the market values of the firm's debt and equity securities.
Which one of the following statements is correct?
A) Firms will correctly accept or reject every project if they adopt the subjective
approach.
B) The pure play approach should only be used with low-risk projects.
C) The subjective approach assesses the risks of each project and assigns an
adjustment factor that is unique just for that project.
, D) Mandatory projects should only be accepted if they produce a positive NPV when the
firm's WACC is used as the discount rate.
E) Overall, a firm makes better decisions when it uses the subjective approach than
when it uses its WACC as the discount rate for all projects. - Answer- E) Overall, a firm
makes better decisions when it uses the subjective approach than when it uses its
WACC as the discount rate for all projects.
Why does the tax amount need adjusted when valuing a firm using the cash flow from
assets approach?
A) Only straight-linedepreciation can be used when computing taxes for valuation
purposes.
B) The tax effect of the interest expense must be removed.
C) The taxes must be computed for valuation purposes based on the average tax rate
for the past 10 years.
D) The tax effect of the dividend payments must be eliminated.
E) Taxes must be computed for valuation purposes based solely on the marginal tax
rate. - Answer- B) The tax effect of the interest expense must be removed.
The discount rate assigned to an individual project should be based on the:
A) Firm's weighted average cost of capital.
B) Average of the firm's overall cost of capital for the past five years.
C) Current risk level of the overall firm.
D) Risks associated with the use of the funds required by the project.
E) Actual sources of funding used for the project. - Answer- D) Risks associated with
the use of the funds required by the project.
You are viewing a graph that plots the NPVs of a project to various discount rates that
could be applied to the project's cash flows. What is the name given to this graph?
A) Present value sequence.
B) NPV route.
C) NPV profile.
D) Project tract.
E) Projected risk profile. - Answer- C) NPV profile.
The IRR that causes the net present value of the differences between two project's cash
flows to equal zero is called the:
A) Present value rate.
B) Zero-sum rate.
C) Break-even rate.
D) Required return.
E) Crossover rate. - Answer- E) Crossover rate.
A project has a net present value of zero. Which one of the following best describes this
project?
A) The project's cash inflows equal its cash outflows in current dollar terms.
B) The project has a zero percent rate of return.
