FINANCE FINAL EXAM (ACTUAL QUESTIONS AND
ANSWERS)
1. Which of the following best describes the primary goal of financial management?
A. Maximizing revenue
B. Minimizing costs
C. Maximizing shareholder wealth
D. Increasing market share
Correct Answer: C
Rationale: The fundamental objective of financial management is maximizing
shareholder wealth, not just profits, revenue, or market share. It considers risk and
timing of returns.
2. What is the present value of $1,000 to be received in 2 years at a discount rate of
10%?
A. $826.45
B. $909.09
C. $1,100
D. $800
Correct Answer: A
Rationale: PV = 1000 / (1.1)^2 = 826.45. Other options either ignore compounding
or use incorrect rates.
3. Which financial statement shows a firm's financial position at a specific point in time?
A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Statement of Retained Earnings
Correct Answer: C
Rationale: The balance sheet provides a snapshot of assets, liabilities, and equity at a
given date.
4. Which ratio measures a firm’s ability to meet short-term obligations?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Asset turnover ratio
Correct Answer: B
Rationale: The current ratio compares current assets to current liabilities, indicating
liquidity.
,5. If a project’s NPV is positive, the firm should:
A. Reject the project
B. Accept the project
C. Ignore the project
D. Recalculate IRR
Correct Answer: B
Rationale: A positive NPV indicates the project adds value to the firm and should be
accepted.
6. Which of the following risks can be diversified away?
A. Market risk
B. Systematic risk
C. Unsystematic risk
D. Interest rate risk
Correct Answer: C
Rationale: Unsystematic risk is firm-specific and can be reduced through
diversification.
7. The weighted average cost of capital (WACC) is used primarily as:
A. A measure of profitability
B. A discount rate for investment appraisal
C. A liquidity measure
D. A leverage ratio
Correct Answer: B
Rationale: WACC is used as a discount rate in capital budgeting decisions.
8. Which of the following increases bond prices?
A. Increase in interest rates
B. Decrease in interest rates
C. Increase in inflation
D. Increase in risk premium
Correct Answer: B
Rationale: Bond prices move inversely to interest rates; when rates fall, prices rise.
9. What does IRR represent?
A. Cost of capital
B. Discount rate that makes NPV zero
C. Average return
D. Total profit
Correct Answer: B
Rationale: IRR is the rate at which the present value of inflows equals outflows.
,10. Which of the following is a capital budgeting decision?
A. Choosing suppliers
B. Deciding dividend policy
C. Evaluating long-term investments
D. Managing inventory
Correct Answer: C
Rationale: Capital budgeting involves evaluating long-term investment opportunities.
11. A higher beta indicates:
A. Lower risk than the market
B. Same risk as the market
C. Higher systematic risk than the market
D. No risk
Correct Answer: C
Rationale: Beta measures systematic risk; a higher beta means greater volatility than
the market.
12. Which formula calculates Return on Equity (ROE)?
A. Net Income / Total Assets
B. Net Income / Shareholder’s Equity
C. EBIT / Total Assets
D. Sales / Equity
Correct Answer: B
Rationale: ROE measures profitability relative to shareholders' investment.
13. What is the main advantage of using NPV over IRR?
A. Easier to compute
B. Assumes constant cash flows
C. Provides absolute value addition
D. Ignores cost of capital
Correct Answer: C
Rationale: NPV shows the actual value added in monetary terms, unlike IRR which is
a rate.
14. Which component is NOT included in WACC?
A. Cost of debt
B. Cost of equity
C. Cost of preferred stock
D. Operating expenses
, Correct Answer: D
Rationale: WACC includes financing costs, not operational expenses.
15. What does a high debt-to-equity ratio indicate?
A. Low financial risk
B. High leverage
C. High liquidity
D. Low profitability
Correct Answer: B
Rationale: A high ratio means the firm relies heavily on debt financing.
16. Which of the following is an example of a derivative instrument?
A. Bond
B. Stock
C. Option
D. Treasury bill
Correct Answer: C
Rationale: Options derive value from underlying assets, making them derivatives.
17. What is the primary purpose of diversification?
A. Increase returns only
B. Eliminate all risks
C. Reduce unsystematic risk
D. Increase systematic risk
Correct Answer: C
Rationale: Diversification reduces firm-specific risk but not market risk.
18. Which valuation model is commonly used for dividend-paying stocks?
A. CAPM
B. Dividend Discount Model
C. IRR Model
D. Payback Model
Correct Answer: B
Rationale: The DDM values stocks based on expected future dividends.
19. Payback period ignores:
A. Initial investment
B. Time value of money
C. Cash inflows
D. Project life
ANSWERS)
1. Which of the following best describes the primary goal of financial management?
A. Maximizing revenue
B. Minimizing costs
C. Maximizing shareholder wealth
D. Increasing market share
Correct Answer: C
Rationale: The fundamental objective of financial management is maximizing
shareholder wealth, not just profits, revenue, or market share. It considers risk and
timing of returns.
2. What is the present value of $1,000 to be received in 2 years at a discount rate of
10%?
A. $826.45
B. $909.09
C. $1,100
D. $800
Correct Answer: A
Rationale: PV = 1000 / (1.1)^2 = 826.45. Other options either ignore compounding
or use incorrect rates.
3. Which financial statement shows a firm's financial position at a specific point in time?
A. Income Statement
B. Cash Flow Statement
C. Balance Sheet
D. Statement of Retained Earnings
Correct Answer: C
Rationale: The balance sheet provides a snapshot of assets, liabilities, and equity at a
given date.
4. Which ratio measures a firm’s ability to meet short-term obligations?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Asset turnover ratio
Correct Answer: B
Rationale: The current ratio compares current assets to current liabilities, indicating
liquidity.
,5. If a project’s NPV is positive, the firm should:
A. Reject the project
B. Accept the project
C. Ignore the project
D. Recalculate IRR
Correct Answer: B
Rationale: A positive NPV indicates the project adds value to the firm and should be
accepted.
6. Which of the following risks can be diversified away?
A. Market risk
B. Systematic risk
C. Unsystematic risk
D. Interest rate risk
Correct Answer: C
Rationale: Unsystematic risk is firm-specific and can be reduced through
diversification.
7. The weighted average cost of capital (WACC) is used primarily as:
A. A measure of profitability
B. A discount rate for investment appraisal
C. A liquidity measure
D. A leverage ratio
Correct Answer: B
Rationale: WACC is used as a discount rate in capital budgeting decisions.
8. Which of the following increases bond prices?
A. Increase in interest rates
B. Decrease in interest rates
C. Increase in inflation
D. Increase in risk premium
Correct Answer: B
Rationale: Bond prices move inversely to interest rates; when rates fall, prices rise.
9. What does IRR represent?
A. Cost of capital
B. Discount rate that makes NPV zero
C. Average return
D. Total profit
Correct Answer: B
Rationale: IRR is the rate at which the present value of inflows equals outflows.
,10. Which of the following is a capital budgeting decision?
A. Choosing suppliers
B. Deciding dividend policy
C. Evaluating long-term investments
D. Managing inventory
Correct Answer: C
Rationale: Capital budgeting involves evaluating long-term investment opportunities.
11. A higher beta indicates:
A. Lower risk than the market
B. Same risk as the market
C. Higher systematic risk than the market
D. No risk
Correct Answer: C
Rationale: Beta measures systematic risk; a higher beta means greater volatility than
the market.
12. Which formula calculates Return on Equity (ROE)?
A. Net Income / Total Assets
B. Net Income / Shareholder’s Equity
C. EBIT / Total Assets
D. Sales / Equity
Correct Answer: B
Rationale: ROE measures profitability relative to shareholders' investment.
13. What is the main advantage of using NPV over IRR?
A. Easier to compute
B. Assumes constant cash flows
C. Provides absolute value addition
D. Ignores cost of capital
Correct Answer: C
Rationale: NPV shows the actual value added in monetary terms, unlike IRR which is
a rate.
14. Which component is NOT included in WACC?
A. Cost of debt
B. Cost of equity
C. Cost of preferred stock
D. Operating expenses
, Correct Answer: D
Rationale: WACC includes financing costs, not operational expenses.
15. What does a high debt-to-equity ratio indicate?
A. Low financial risk
B. High leverage
C. High liquidity
D. Low profitability
Correct Answer: B
Rationale: A high ratio means the firm relies heavily on debt financing.
16. Which of the following is an example of a derivative instrument?
A. Bond
B. Stock
C. Option
D. Treasury bill
Correct Answer: C
Rationale: Options derive value from underlying assets, making them derivatives.
17. What is the primary purpose of diversification?
A. Increase returns only
B. Eliminate all risks
C. Reduce unsystematic risk
D. Increase systematic risk
Correct Answer: C
Rationale: Diversification reduces firm-specific risk but not market risk.
18. Which valuation model is commonly used for dividend-paying stocks?
A. CAPM
B. Dividend Discount Model
C. IRR Model
D. Payback Model
Correct Answer: B
Rationale: The DDM values stocks based on expected future dividends.
19. Payback period ignores:
A. Initial investment
B. Time value of money
C. Cash inflows
D. Project life
