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FINA 5320 Exam 2 2026/2027 | Latest Verified Questions
and Detailed Answers
OVERVIEW DESCRIPTION:
This set of multiple-choice questions is designed as a comprehensive review for FINA 5320
Exam 2, focusing on graduate-level corporate finance applications. The questions
rigorously test mastery of capital budgeting (including incremental cash flow estimation,
NPV, IRR, and depreciation tax shields), cost of capital calculations (WACC, CAPM, beta
analysis), and valuation principles (bond pricing, YTM, dividend discount models).
Emphasizing application-based problem-solving, the collection covers critical distinctions
such as systematic versus total risk, the handling of sunk costs and flotation costs, and the
practical implementation of market efficiency concepts, ensuring students can effectively
evaluate projects and determine required returns in complex scenarios.
QUESTION 1
Which of the following is most likely to be considered a sunk cost when evaluating a
capital project?
A) A market research study conducted last year to assess demand for the new product
B) The cost of new machinery required for the project
C) The reduction in sales of an existing product caused by the new product launch
D) The initial investment in working capital
CORRECT ANSWER: A
EXPERT RATIONALE: Sunk costs are historical expenditures that cannot be recovered
and are irrelevant to the go/no-go decision. The market research cost has already been
incurred regardless of the project's acceptance.
QUESTION 2
A firm is analyzing a project that will utilize a building it currently owns. The building is
fully depreciated but could be sold today for $500,000. If the firm uses the building for
the project, what is the relevant opportunity cost?
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A) $0, because the building is fully depreciated
B) The original purchase price of the building
C) The after-tax proceeds from the potential sale of $500,000
D) The book value of the building
CORRECT ANSWER: C
EXPERT RATIONALE: Opportunity cost is the cash flow the firm forgoes by using an asset
for the project. The relevant cost is the net after-tax cash flow from selling the building
today.
QUESTION 3
When calculating the initial cash outflow for a project, which of the following should be
included?
A) Sunk costs from prior feasibility studies
B) Financing costs such as interest on debt
C) The installed cost of new equipment, including shipping and installation
D) Allocated overhead costs from the corporate headquarters
CORRECT ANSWER: C
EXPERT RATIONALE: Initial outlay includes the purchase price plus any costs necessary
to get the asset into operating condition. Sunk costs are irrelevant, and financing costs
are accounted for in the discount rate, not cash flows.
QUESTION 4
What is the primary purpose of calculating the Weighted Average Cost of Capital
(WACC)?
A) To determine the historical cost of funds raised by the firm
B) To serve as the required rate of return for projects with the same risk as the firm's
existing operations
C) To calculate the book value of the firm's equity
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D) To minimize the firm's tax liability
CORRECT ANSWER: B
EXPERT RATIONALE: WACC represents the overall required return for the firm's assets. It
is used as the discount rate for projects that have a similar risk profile to the firm's
current operations.
QUESTION 5
According to the Capital Asset Pricing Model (CAPM), the cost of equity is calculated as:
A) Risk-free rate + Beta * (Market risk premium)
B) Risk-free rate + Beta * (Standard deviation of the market)
C) (Dividends per share / Market price) + Growth rate
D) (Net Income / Total Equity)
CORRECT ANSWER: A
EXPERT RATIONALE: CAPM defines the expected return as the risk-free rate plus a risk
premium based on systematic risk (beta). This is the standard formula: E(Ri) = Rf +
βi(E(Rm) – Rf).
QUESTION 6
A project has an initial cost of $1 million and is expected to generate $250,000 in after-
tax cash flows for 5 years. If the firm's WACC is 10%, what is the project's Net Present
Value (NPV)?
A) -$52,260
B) $52,260
C) $250,000
D) -$100,000
CORRECT ANSWER: A
EXPERT RATIONALE: NPV = -1,000,000 + 250,000 * PVIFA(10%,5). PVIFA = 3.7908, so PV
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= $947,700. NPV = -$52,300, making A the closest. A negative NPV indicates the project
destroys value.
QUESTION 7
Which of the following best describes the "depreciation tax shield"?
A) The actual cash outflow for the purchase of a depreciable asset
B) The reduction in taxable income resulting from depreciation expense
C) The total depreciation taken over the life of the asset
D) The increase in net working capital required for a project
CORRECT ANSWER: B
EXPERT RATIONALE: The tax shield is the depreciation expense multiplied by the tax
rate. It reduces taxes payable, thereby increasing operating cash flow, even though
depreciation is a non-cash expense.
QUESTION 8
If a firm's beta is 1.5, the risk-free rate is 4%, and the market risk premium is 6%, what is
the cost of equity using CAPM?
A) 10.0%
B) 13.0%
C) 9.0%
D) 7.5%
CORRECT ANSWER: B
EXPERT RATIONALE: Cost of Equity = 4% + 1.5 * (6%) = 4% + 9% = 13%. The market risk
premium is the excess return of the market over the risk-free rate.
QUESTION 9
A bond with a $1,000 par value pays a 6% semi-annual coupon and matures in 10 years.
If the market requires a yield to maturity (YTM) of 8%, what is the current price of the
FINA 5320 Exam 2 2026/2027 | Latest Verified Questions
and Detailed Answers
OVERVIEW DESCRIPTION:
This set of multiple-choice questions is designed as a comprehensive review for FINA 5320
Exam 2, focusing on graduate-level corporate finance applications. The questions
rigorously test mastery of capital budgeting (including incremental cash flow estimation,
NPV, IRR, and depreciation tax shields), cost of capital calculations (WACC, CAPM, beta
analysis), and valuation principles (bond pricing, YTM, dividend discount models).
Emphasizing application-based problem-solving, the collection covers critical distinctions
such as systematic versus total risk, the handling of sunk costs and flotation costs, and the
practical implementation of market efficiency concepts, ensuring students can effectively
evaluate projects and determine required returns in complex scenarios.
QUESTION 1
Which of the following is most likely to be considered a sunk cost when evaluating a
capital project?
A) A market research study conducted last year to assess demand for the new product
B) The cost of new machinery required for the project
C) The reduction in sales of an existing product caused by the new product launch
D) The initial investment in working capital
CORRECT ANSWER: A
EXPERT RATIONALE: Sunk costs are historical expenditures that cannot be recovered
and are irrelevant to the go/no-go decision. The market research cost has already been
incurred regardless of the project's acceptance.
QUESTION 2
A firm is analyzing a project that will utilize a building it currently owns. The building is
fully depreciated but could be sold today for $500,000. If the firm uses the building for
the project, what is the relevant opportunity cost?
,2|Page
A) $0, because the building is fully depreciated
B) The original purchase price of the building
C) The after-tax proceeds from the potential sale of $500,000
D) The book value of the building
CORRECT ANSWER: C
EXPERT RATIONALE: Opportunity cost is the cash flow the firm forgoes by using an asset
for the project. The relevant cost is the net after-tax cash flow from selling the building
today.
QUESTION 3
When calculating the initial cash outflow for a project, which of the following should be
included?
A) Sunk costs from prior feasibility studies
B) Financing costs such as interest on debt
C) The installed cost of new equipment, including shipping and installation
D) Allocated overhead costs from the corporate headquarters
CORRECT ANSWER: C
EXPERT RATIONALE: Initial outlay includes the purchase price plus any costs necessary
to get the asset into operating condition. Sunk costs are irrelevant, and financing costs
are accounted for in the discount rate, not cash flows.
QUESTION 4
What is the primary purpose of calculating the Weighted Average Cost of Capital
(WACC)?
A) To determine the historical cost of funds raised by the firm
B) To serve as the required rate of return for projects with the same risk as the firm's
existing operations
C) To calculate the book value of the firm's equity
,3|Page
D) To minimize the firm's tax liability
CORRECT ANSWER: B
EXPERT RATIONALE: WACC represents the overall required return for the firm's assets. It
is used as the discount rate for projects that have a similar risk profile to the firm's
current operations.
QUESTION 5
According to the Capital Asset Pricing Model (CAPM), the cost of equity is calculated as:
A) Risk-free rate + Beta * (Market risk premium)
B) Risk-free rate + Beta * (Standard deviation of the market)
C) (Dividends per share / Market price) + Growth rate
D) (Net Income / Total Equity)
CORRECT ANSWER: A
EXPERT RATIONALE: CAPM defines the expected return as the risk-free rate plus a risk
premium based on systematic risk (beta). This is the standard formula: E(Ri) = Rf +
βi(E(Rm) – Rf).
QUESTION 6
A project has an initial cost of $1 million and is expected to generate $250,000 in after-
tax cash flows for 5 years. If the firm's WACC is 10%, what is the project's Net Present
Value (NPV)?
A) -$52,260
B) $52,260
C) $250,000
D) -$100,000
CORRECT ANSWER: A
EXPERT RATIONALE: NPV = -1,000,000 + 250,000 * PVIFA(10%,5). PVIFA = 3.7908, so PV
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= $947,700. NPV = -$52,300, making A the closest. A negative NPV indicates the project
destroys value.
QUESTION 7
Which of the following best describes the "depreciation tax shield"?
A) The actual cash outflow for the purchase of a depreciable asset
B) The reduction in taxable income resulting from depreciation expense
C) The total depreciation taken over the life of the asset
D) The increase in net working capital required for a project
CORRECT ANSWER: B
EXPERT RATIONALE: The tax shield is the depreciation expense multiplied by the tax
rate. It reduces taxes payable, thereby increasing operating cash flow, even though
depreciation is a non-cash expense.
QUESTION 8
If a firm's beta is 1.5, the risk-free rate is 4%, and the market risk premium is 6%, what is
the cost of equity using CAPM?
A) 10.0%
B) 13.0%
C) 9.0%
D) 7.5%
CORRECT ANSWER: B
EXPERT RATIONALE: Cost of Equity = 4% + 1.5 * (6%) = 4% + 9% = 13%. The market risk
premium is the excess return of the market over the risk-free rate.
QUESTION 9
A bond with a $1,000 par value pays a 6% semi-annual coupon and matures in 10 years.
If the market requires a yield to maturity (YTM) of 8%, what is the current price of the
