FIN 300 PRACTICE EXAMINATION 2026
QUESTIONS WITH ANSWERS GRADED A+
◍ When PV goes up, r goes ____.
Answer: down
◍ compound annual growth rate (CAGR).
Answer: The annual rate of return that generates an ending balance from a
beginning balance if one reinvests the profits at the end of each year
◍ hostile takeover.
Answer: When a company or individual tries to wrest control of a corporate
target from its unwilling board and management team. A common
motivation is the belief that the target is undervalued because it's poorly run.
◍ S-corporation.
Answer: A corporation with 100 or fewer owners that elects to follow the
rules of subchapter S of the IRS tax code. S-corporation profits have a
tax-paying option to pay taxes as a pass-through, or elect become a C-corp,
and pay tax under its rules
◍ financial distress.
Answer: A situation where a firm has difficulty meeting its creditor
obligations but has not yet failed to do so
◍ stochastic process.
Answer: A sequence of random variables revealed over time. A stochastic
process produces discrete outcomes that jump around, making it a
discontinuous function.
◍ credit or default risk.
Answer: The chance that a borrower will not fulfill their contractual
obligations to a lender.
,◍ You are a shareholder in Laser Photonics, known as LASE, whose shares
currently trade at $25 per share. ApolloGlobal Management offers to buy
LASE at a 25% premium. LASE's management team informs its
shareholdersabout the bid but rejects Apollo's offer because LASE's CEO
thinks its shares are mispriced and are worth $35. Isthe CEO acting in the
best interests of the shareholders?.
Answer: -Yes, the CEO could be acting in shareholders’ best interests if $35
is well-supported and likely realizable, and the board runs a process to
maximize price (negotiate/auction).-No, not necessarily—a bare claim of
“mispricing” isn’t enough. If the higher value is speculative or hard to
realize, taking $31.25 might be the shareholder-optimal move
◍ unlevered.
Answer: An all-equity company.
◍ Which sequence best describes how financial markets respond to
mispricing? Select the single best answer.
A. Positive NPV → Arbitrage → Price Adjustment → Law of One Price
B. Arbitrage → Mispricing → Positive NPV → Equilibrium
C. Law of One Price → Arbitrage → Mispricing → NPV
D. Arbitrage → Positive NPV → Persistent profit opportunities
E. Price Adjustment → Positive NPV → Arbitrage → Law of One Price
F. Mispricing → Arbitrage → Law of One Price → Zero NPV.
Answer: F
◍ bond issuer.
Answer: The business or government borrowing money by offering its
bonds to the public
◍ nominal interest rate.
Answer: The percentage change in dollars per period. For a riskless asset,
such as a T-bill, it's the rate of return you will earn. Otherwise, the nominal
interest rate is a random variable with an expected value.
◍ principal.
, Answer: Most often, it is the loan amount initially transferred from a lender
to a borrower. It is the initial value for interest calculations. Principal can
also mean the money put into an investment. For example, charitable
donations to endowments and foundations are the principal of their
portfolios
◍ risk-averse.
Answer: The behavior of an individual who views risk as an economic bad.
Risk-averse individuals care about both the first and second moments of a
random variable's distribution—the expected value and variance or standard
deviation
◍ money market.
Answer: The financial market in which businesses and governments raise
funds by issuing short-term securities of a year or less. Commercial paper
and T-bills are money market instruments
◍ Dudley evaluates a project with a three-year life and an initial startup cost of
$56,000. It generates an after-tax profit of $83,250 at the end of year 3.
What is the project worth if the annual discount rate is 18%? Should Dudley
accept or reject it? Round your final answer to the nearest whole dollar. For
example, $1,234.56 is $1,235.
Answer: Dudley should reject the project because he would pay $56,000 for
something worth about $50,669, destroyingnearly $5,331 of value
◍ board of directors or the board.
Answer: The elected representatives of the shareholders who have a
fiduciary obligation to act in the best interests of the principals.
◍ corporate governance.
Answer: The set of rules, procedures, processes, social norms, and ethics
that create an environment that determines the alignment between the
wishes of the shareholders and the actions of their board and C-suite.
◍ agency costs, direct:.
Answer: The measurable monetary costs that arise from conflicts of interest
, between the owners and managers of a corporation. There are two types of
direct agency costs. First, there is the money the C-suite wastes on itself
rather than paying to the shareholders. Second, the resources expended to
monitor the managers, such as audits.
◍ bondholder.
Answer: The lender to a business or government who does so by purchasing
a bond.
◍ mutual fund.
Answer: An institutional investor typically pools money from retail
investors and uses the funds to purchase securities on their behalf. Public
stocks, bonds, or a mix of both usually constitute the mutual fund's
portfolio. Because mutual funds attract large numbers of small,
unsophisticated investors, the Securities and Exchange Commission heavily
regulates the industry. Consequently, mutual funds have portfolio
restrictions to protect their investors. While fees vary widely, they are much
lower than those charged by hedge funds.
◍ maximize the value of the firm or value maximization.
Answer: The primary goal of for-profit businesses. For corporations, the
term is synonymous with maximizing the current stock price. For other
business forms, it means maximizing the market value of the owners' equity.
◍ coupons.
Answer: The regular interest-only payments bond issuers make to
bondholders.
◍ Neville gave Luna $50 as a present six years ago. She invested this money at
an interest rate of 0.25% per month. How much will this money be worth to
Luna 10 years from today? Round your answer to the penny. Forexample,
$1,234.5678 is $1,234.57.
Answer: FV = 80.75533302, or $80.76
◍ limited liability.
Answer: When the maximum loss an owner can realize is their investment in
QUESTIONS WITH ANSWERS GRADED A+
◍ When PV goes up, r goes ____.
Answer: down
◍ compound annual growth rate (CAGR).
Answer: The annual rate of return that generates an ending balance from a
beginning balance if one reinvests the profits at the end of each year
◍ hostile takeover.
Answer: When a company or individual tries to wrest control of a corporate
target from its unwilling board and management team. A common
motivation is the belief that the target is undervalued because it's poorly run.
◍ S-corporation.
Answer: A corporation with 100 or fewer owners that elects to follow the
rules of subchapter S of the IRS tax code. S-corporation profits have a
tax-paying option to pay taxes as a pass-through, or elect become a C-corp,
and pay tax under its rules
◍ financial distress.
Answer: A situation where a firm has difficulty meeting its creditor
obligations but has not yet failed to do so
◍ stochastic process.
Answer: A sequence of random variables revealed over time. A stochastic
process produces discrete outcomes that jump around, making it a
discontinuous function.
◍ credit or default risk.
Answer: The chance that a borrower will not fulfill their contractual
obligations to a lender.
,◍ You are a shareholder in Laser Photonics, known as LASE, whose shares
currently trade at $25 per share. ApolloGlobal Management offers to buy
LASE at a 25% premium. LASE's management team informs its
shareholdersabout the bid but rejects Apollo's offer because LASE's CEO
thinks its shares are mispriced and are worth $35. Isthe CEO acting in the
best interests of the shareholders?.
Answer: -Yes, the CEO could be acting in shareholders’ best interests if $35
is well-supported and likely realizable, and the board runs a process to
maximize price (negotiate/auction).-No, not necessarily—a bare claim of
“mispricing” isn’t enough. If the higher value is speculative or hard to
realize, taking $31.25 might be the shareholder-optimal move
◍ unlevered.
Answer: An all-equity company.
◍ Which sequence best describes how financial markets respond to
mispricing? Select the single best answer.
A. Positive NPV → Arbitrage → Price Adjustment → Law of One Price
B. Arbitrage → Mispricing → Positive NPV → Equilibrium
C. Law of One Price → Arbitrage → Mispricing → NPV
D. Arbitrage → Positive NPV → Persistent profit opportunities
E. Price Adjustment → Positive NPV → Arbitrage → Law of One Price
F. Mispricing → Arbitrage → Law of One Price → Zero NPV.
Answer: F
◍ bond issuer.
Answer: The business or government borrowing money by offering its
bonds to the public
◍ nominal interest rate.
Answer: The percentage change in dollars per period. For a riskless asset,
such as a T-bill, it's the rate of return you will earn. Otherwise, the nominal
interest rate is a random variable with an expected value.
◍ principal.
, Answer: Most often, it is the loan amount initially transferred from a lender
to a borrower. It is the initial value for interest calculations. Principal can
also mean the money put into an investment. For example, charitable
donations to endowments and foundations are the principal of their
portfolios
◍ risk-averse.
Answer: The behavior of an individual who views risk as an economic bad.
Risk-averse individuals care about both the first and second moments of a
random variable's distribution—the expected value and variance or standard
deviation
◍ money market.
Answer: The financial market in which businesses and governments raise
funds by issuing short-term securities of a year or less. Commercial paper
and T-bills are money market instruments
◍ Dudley evaluates a project with a three-year life and an initial startup cost of
$56,000. It generates an after-tax profit of $83,250 at the end of year 3.
What is the project worth if the annual discount rate is 18%? Should Dudley
accept or reject it? Round your final answer to the nearest whole dollar. For
example, $1,234.56 is $1,235.
Answer: Dudley should reject the project because he would pay $56,000 for
something worth about $50,669, destroyingnearly $5,331 of value
◍ board of directors or the board.
Answer: The elected representatives of the shareholders who have a
fiduciary obligation to act in the best interests of the principals.
◍ corporate governance.
Answer: The set of rules, procedures, processes, social norms, and ethics
that create an environment that determines the alignment between the
wishes of the shareholders and the actions of their board and C-suite.
◍ agency costs, direct:.
Answer: The measurable monetary costs that arise from conflicts of interest
, between the owners and managers of a corporation. There are two types of
direct agency costs. First, there is the money the C-suite wastes on itself
rather than paying to the shareholders. Second, the resources expended to
monitor the managers, such as audits.
◍ bondholder.
Answer: The lender to a business or government who does so by purchasing
a bond.
◍ mutual fund.
Answer: An institutional investor typically pools money from retail
investors and uses the funds to purchase securities on their behalf. Public
stocks, bonds, or a mix of both usually constitute the mutual fund's
portfolio. Because mutual funds attract large numbers of small,
unsophisticated investors, the Securities and Exchange Commission heavily
regulates the industry. Consequently, mutual funds have portfolio
restrictions to protect their investors. While fees vary widely, they are much
lower than those charged by hedge funds.
◍ maximize the value of the firm or value maximization.
Answer: The primary goal of for-profit businesses. For corporations, the
term is synonymous with maximizing the current stock price. For other
business forms, it means maximizing the market value of the owners' equity.
◍ coupons.
Answer: The regular interest-only payments bond issuers make to
bondholders.
◍ Neville gave Luna $50 as a present six years ago. She invested this money at
an interest rate of 0.25% per month. How much will this money be worth to
Luna 10 years from today? Round your answer to the penny. Forexample,
$1,234.5678 is $1,234.57.
Answer: FV = 80.75533302, or $80.76
◍ limited liability.
Answer: When the maximum loss an owner can realize is their investment in
