CORPORATE FINANCE EXAM PRACTICE
QUESTIONS WITH VERIFIED ANSWERS NEW
MODIFIED LATEST UPDATE
You are expecting to get $3000 in five years (5 years from now). Assume interest rate is 8%
and quarterly compounding. (Answer format: keep the integer, 135.67 => 135)
1) What will be the value in year 2?
2) What will be the value in year 8? --CORRECT ANSWER--1) PV:
FV: 3000
N: 3 x 4 = 12
I/Y: 8% ÷ = 2%
Present value = future value÷(1+ interest rate)^n
3000 ÷ *(1 + 0.08/4)^(3 x 4) = 2366
2) PV: 3000
PMT: 0
I/Y: 8% ÷ 4 quarterly = 2%
N: 3 years x 4 quarterly = 12
FV: 3804
A = 3000*(1 + 0.08/4)^(3 x 4) = 3804
1) An investment offers $4,000 every quarter for 20 years, with the first payment occurring 1
quarter from now. If the required return is 8 percent, what is the value of the investment?
Page 1 of 101
,2) An investment offers $4,000 every quarter for 20 years, with the first payment just
occurred. If the required return is 8 percent, what is the value of the investment?
3) An investment offers $4,000 every quarter forever. If the required return is 8 percent, what
is the value of the investment? --CORRECT ANSWER--1) PMT: 4000
N: 20 year x quarterly = 80
I/Y: 8% ÷ 4 = 2
FV: 0
PV: 158,978
2) 158,978 x 1.02 = 162,157.56
3) FOREVER
4000 ÷ .02 = 200,000
Which form of business structure faces the greatest agency problems? --CORRECT
ANSWER--corporation
3. A firm's ______ refers to the management of firm's fixed assets; a firm's ______ refers to
the firm's proportions of financing from current and long-term debt and equity; a firm's
______ refers to the firm's net working capital --CORRECT ANSWER--capital budgeting;
capital structure; short-term management
What is the goal of financial management?
The goal of financial management is _______. --CORRECT ANSWER--maximizing the
value of existing owner's equity
The goal of financial management is to maximize the current value per share of the existing
stock
Page 2 of 101
,A business formed by _____ individuals is referred to as partnership; the partnership who
each have _____ personal liability for all of the firm's debts is called general partnership. --
CORRECT ANSWER--two or more, unlimited
partnership in which partners share equally in both responsibility and liability
A _____ between the stockholders and management of a firm is referred to as the agency
problem. --CORRECT ANSWER--conflict of interest
A common example of an agency relationship is a real estate broker—in particular if you
break it down between a buyer's agent and a seller's agent. A classic conflict of interest is
when the agent is paid on commission, so they may be less willing to let the buyer know that
a lower price might be accepted, or they may elect to only show the buyer homes that are
listed at the high end of the buyer's price range.
There are two financial products. A will offer $120,000 in five years. B will offer $5000
every quarter from now for five years. Assuming quarterly compounding and your required
return is 10%. Which product should you invest today?
What is the present value of product A?
What is the present value of product B?
Which product is more valuable today, A or B? --CORRECT ANSWER--A) FV: 120,000 N:
5 x 4 (Quarterly) = 20
I/Y: 10%/4 = 2.5 PMT: 0
PV: 73232
B) N: 5 x 4 = 20 PMT: 5000
I/Y: 10%/4 = 2.5 FV: N/A
PV: 77,945.81
Page 3 of 101
, Accelerate 77945.81 x 1.025 = 79894
There are two financial products. A will offer $100,000 in five years. B will offer $1,500
every month from now for five years.
Product A is (single or multiple) cash flow(s)? $100,000 is (present or future) value?
Product B is (single or multiple) cash flow(s)? How many cash flow(s) in total? --CORRECT
ANSWER--Product A is single
$100,000 is (present or future) value? future
Product B is multiple
How many cash flow(s) in total? 60
Assume APR = 10%, fill the following table where m is compounding frequency and
compute EAR (4 digits after decimal NOT %, e.g., 0.12367 -> 0.1234)
Annual compounding
m=1
EAR = APR = 0.1000 --CORRECT ANSWER--Effective annual rate = (1 + r/m)^m − 1
Semi-annual compounding
m=2
EAR = (1+ .1÷ 2)^2 - 1 = .1025
Quarterly compounding
m=4
EAR = (1+ .1÷4)^4 - 1 = .1038
Monthly compounding
m = 12
Page 4 of 101
QUESTIONS WITH VERIFIED ANSWERS NEW
MODIFIED LATEST UPDATE
You are expecting to get $3000 in five years (5 years from now). Assume interest rate is 8%
and quarterly compounding. (Answer format: keep the integer, 135.67 => 135)
1) What will be the value in year 2?
2) What will be the value in year 8? --CORRECT ANSWER--1) PV:
FV: 3000
N: 3 x 4 = 12
I/Y: 8% ÷ = 2%
Present value = future value÷(1+ interest rate)^n
3000 ÷ *(1 + 0.08/4)^(3 x 4) = 2366
2) PV: 3000
PMT: 0
I/Y: 8% ÷ 4 quarterly = 2%
N: 3 years x 4 quarterly = 12
FV: 3804
A = 3000*(1 + 0.08/4)^(3 x 4) = 3804
1) An investment offers $4,000 every quarter for 20 years, with the first payment occurring 1
quarter from now. If the required return is 8 percent, what is the value of the investment?
Page 1 of 101
,2) An investment offers $4,000 every quarter for 20 years, with the first payment just
occurred. If the required return is 8 percent, what is the value of the investment?
3) An investment offers $4,000 every quarter forever. If the required return is 8 percent, what
is the value of the investment? --CORRECT ANSWER--1) PMT: 4000
N: 20 year x quarterly = 80
I/Y: 8% ÷ 4 = 2
FV: 0
PV: 158,978
2) 158,978 x 1.02 = 162,157.56
3) FOREVER
4000 ÷ .02 = 200,000
Which form of business structure faces the greatest agency problems? --CORRECT
ANSWER--corporation
3. A firm's ______ refers to the management of firm's fixed assets; a firm's ______ refers to
the firm's proportions of financing from current and long-term debt and equity; a firm's
______ refers to the firm's net working capital --CORRECT ANSWER--capital budgeting;
capital structure; short-term management
What is the goal of financial management?
The goal of financial management is _______. --CORRECT ANSWER--maximizing the
value of existing owner's equity
The goal of financial management is to maximize the current value per share of the existing
stock
Page 2 of 101
,A business formed by _____ individuals is referred to as partnership; the partnership who
each have _____ personal liability for all of the firm's debts is called general partnership. --
CORRECT ANSWER--two or more, unlimited
partnership in which partners share equally in both responsibility and liability
A _____ between the stockholders and management of a firm is referred to as the agency
problem. --CORRECT ANSWER--conflict of interest
A common example of an agency relationship is a real estate broker—in particular if you
break it down between a buyer's agent and a seller's agent. A classic conflict of interest is
when the agent is paid on commission, so they may be less willing to let the buyer know that
a lower price might be accepted, or they may elect to only show the buyer homes that are
listed at the high end of the buyer's price range.
There are two financial products. A will offer $120,000 in five years. B will offer $5000
every quarter from now for five years. Assuming quarterly compounding and your required
return is 10%. Which product should you invest today?
What is the present value of product A?
What is the present value of product B?
Which product is more valuable today, A or B? --CORRECT ANSWER--A) FV: 120,000 N:
5 x 4 (Quarterly) = 20
I/Y: 10%/4 = 2.5 PMT: 0
PV: 73232
B) N: 5 x 4 = 20 PMT: 5000
I/Y: 10%/4 = 2.5 FV: N/A
PV: 77,945.81
Page 3 of 101
, Accelerate 77945.81 x 1.025 = 79894
There are two financial products. A will offer $100,000 in five years. B will offer $1,500
every month from now for five years.
Product A is (single or multiple) cash flow(s)? $100,000 is (present or future) value?
Product B is (single or multiple) cash flow(s)? How many cash flow(s) in total? --CORRECT
ANSWER--Product A is single
$100,000 is (present or future) value? future
Product B is multiple
How many cash flow(s) in total? 60
Assume APR = 10%, fill the following table where m is compounding frequency and
compute EAR (4 digits after decimal NOT %, e.g., 0.12367 -> 0.1234)
Annual compounding
m=1
EAR = APR = 0.1000 --CORRECT ANSWER--Effective annual rate = (1 + r/m)^m − 1
Semi-annual compounding
m=2
EAR = (1+ .1÷ 2)^2 - 1 = .1025
Quarterly compounding
m=4
EAR = (1+ .1÷4)^4 - 1 = .1038
Monthly compounding
m = 12
Page 4 of 101
