D362 FINC 3100
Corporate Finance
FA REVIEW 1
© 2024/2025
,1. Multiple Choice: What is the Modigliani-Miller theorem
primarily concerned with?
a) Market efficiency
b) Capital structure
c) Dividend policy
d) Portfolio construction
Answer: b) Capital structure
Rationale: The Modigliani-Miller theorem posits that in a perfect
market, the value of a firm is unaffected by its capital structure.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for an uncertain cash flow.
Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM is used to calculate the required return on
equity or the cost of equity.
3. True/False: The Internal Rate of Return (IRR) can be used to
evaluate the profitability of any investment without considering the
cost of capital.
Answer: False
Rationale: IRR must be compared to the cost of capital to
determine if an investment is worthwhile.
© 2024/2025
, 4. Multiple Response: Which of the following are assumptions of
the Black-Scholes model? (Select all that apply)
a) The risk-free rate is constant.
b) Stock prices follow a lognormal distribution.
c) No dividends are paid out during the life of the option.
d) Markets are efficient.
Answers: a), b), c)
Rationale: These are key assumptions of the Black-Scholes
model for pricing options.
5. Multiple Choice: In the context of corporate finance, what does
'WACC' stand for?
a) Weighted Average Cost of Capital
b) Weighted Annual Credit Capacity
c) Worldwide Accredited Commerce Classification
d) Working Aggregate Cost Calculation
Answer: a) Weighted Average Cost of Capital
Rationale: WACC is the average rate of return a company is
expected to pay its security holders to finance its assets.
© 2024/2025
Corporate Finance
FA REVIEW 1
© 2024/2025
,1. Multiple Choice: What is the Modigliani-Miller theorem
primarily concerned with?
a) Market efficiency
b) Capital structure
c) Dividend policy
d) Portfolio construction
Answer: b) Capital structure
Rationale: The Modigliani-Miller theorem posits that in a perfect
market, the value of a firm is unaffected by its capital structure.
2. Fill-in-the-Blank: The __________ model is used to determine
the discount rate for an uncertain cash flow.
Answer: Capital Asset Pricing Model (CAPM)
Rationale: CAPM is used to calculate the required return on
equity or the cost of equity.
3. True/False: The Internal Rate of Return (IRR) can be used to
evaluate the profitability of any investment without considering the
cost of capital.
Answer: False
Rationale: IRR must be compared to the cost of capital to
determine if an investment is worthwhile.
© 2024/2025
, 4. Multiple Response: Which of the following are assumptions of
the Black-Scholes model? (Select all that apply)
a) The risk-free rate is constant.
b) Stock prices follow a lognormal distribution.
c) No dividends are paid out during the life of the option.
d) Markets are efficient.
Answers: a), b), c)
Rationale: These are key assumptions of the Black-Scholes
model for pricing options.
5. Multiple Choice: In the context of corporate finance, what does
'WACC' stand for?
a) Weighted Average Cost of Capital
b) Weighted Annual Credit Capacity
c) Worldwide Accredited Commerce Classification
d) Working Aggregate Cost Calculation
Answer: a) Weighted Average Cost of Capital
Rationale: WACC is the average rate of return a company is
expected to pay its security holders to finance its assets.
© 2024/2025
