Reference no: EM131044614
1. If an investment is producing a return that is equal to the required return, the investment's net present value will be:
A. positive.
B. greater than the project's initial investment.
C. zero.
D. equal to the project's net profit.
E. less than, or equal to, zero.
2. The payback method of analysis ignores which one of the following?
A. Initial cost of an investment
B. Arbitrary cutoff point
C. Cash flow direction
D. Time value of money
E. Timing of each cash inflow
3. Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?
A. Internal rate of return
B. Payback
C. Average accounting rate of return
D. Net present value
E. Profitability index
4. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
A. tax shield.
B. credit.
C. erosion.
D. opportunity cost.
E. adjustment.
5. Which one of the following is an example of systematic risk?
A. Major layoff by a regional manufacturer of power boats
B. Increase in consumption created by a reduction in federal tax rates
C. Surprise firing of a firm's chief financial officer
D. Closure of a major retail chain of stores
E. Product recall by one manufacturer
6. Which one of the following defines the internal rate of return for a project?
A. Discount rate that creates a zero cash flow from assets
B. Discount rate which results in a zero net present value for the project
C. Discount rate which results in a net present value equal to the project's initial cost
D. Rate of return required by the project's investors
E. The project's current market rate of return
7. Which one of the following indicates that a project is expected to create value for its owners?
A. Profitability index less than 1.0
B. Payback period greater than the requirement
C. Positive net present value
D. Positive average accounting rate of return
E. Internal rate of return that is less than the requirement
8. The net present value:
A. decreases as the required rate of return increases.
B. is equal to the initial investment when the internal rate of return is equal to the required return.
C. method of analysis cannot be applied to mutually exclusive projects.
D. is directly related to the discount rate.
E. is unaffected by the timing of an investment's cash flows.
9. Which one of the following methods of analysis ignores the time value of money?
A. Net present value
B. Internal rate of return
C. Discounted cash flow analysis
D. Payback period
E. Profitability index
10. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?
A. Eroded cash flows
B. Deviated projections
C. Incremental cash flows
D. Directly impacted flows
E. Assumed flows
11. Which one of the following refers to a method of increasing the rate at which an asset is depreciated?
A. Non-cash expense
B. Straight-line depreciation
C. Depreciation tax shield
D. Modified Accelerated cost recovery system
E. Market based depreciation
12. Which one of the following describes systemic risk?
A. Risk that affects a large number of assets
B. An individual security's total risk
C. Diversifiable risk
D. Asset specific risk
E. Risk unique to a firm's management
13. Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?
A. Risk-free rate
B. Market risk premium
C. Expected return minus the risk-free rate
D. Market rate of return
E. Cost of capital
14. A year ago, you purchased 400 shares of Stellar Wood Products, Inc. stock at a price of $8.62 per share. The stock pays an annual dividend of $0.10 per share. Today, you sold all of your shares for $4.80 per share. What is your total dollar return on this investment? How was the ROI acheived?
A. -$382
B. -$372
C. -$1,528
D. -$1,488
E. -$1,360
15. The principle of diversification tells us that:
A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C. spreading an investment across five diverse companies will not lower the total risk.
D. spreading an investment across many diverse assets will eliminate all of the systematic risk.
E. spreading an investment across many diverse assets will eliminate some of the total risk.
16. Calculate the expected return and standard deviation of Stock S and Stock T.
|
State of Economy
|
Probability of State of Economy
|
Return if State Occurs
|
|
Stock S
|
Stock T
|
|
Boom
|
5%
|
11%
|
5%
|
|
Normal
|
85%
|
8%
|
6%
|
|
Recession
|
10%
|
-5%
|
8%
|
17. What is the beta of the following portfolio?
|
Stock
|
Amount Invested
|
Security Beta
|
|
A
|
$6,700
|
1.58
|
|
B
|
$4,900
|
1.23
|
|
C
|
$8,500
|
0.79
|
18. (10 points) R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?
19. Chance, Inc. is considering the following two mutually exclusive projects with similar risks:
|
Year
|
Project A
|
Project B
|
|
0
|
- $48,000
|
- $48,000
|
|
1
|
12,520
|
20,990
|
|
2
|
13,630
|
16,470
|
|
3
|
6,470
|
23,630
|
|
4
|
20,990
|
12,520
|
(a) What is the IRR for each of the projects? If you apply the IRR decision rule, which project should the company accept?
(b) If the required rate is 12 percent, what is the NPV for each of the projects? Which project will you choose if you apply the NPV rule?
(c) Calculate the payback periods. Which project will you choose if you apply the Payback Period rule?
(d) What is you final decision? Explain.
20. An asset used in a 3-year project falls in the seven-year MACRS class for tax purposes. The asset has an acquisition cost of $5.4 million and will be sold for $1.2 million at the end of the project. If the tax rate is 35 percent, what is the after-tax salvage value of the asset?
|
Year
|
3-year Property
|
5-year Property
|
7-year Property
|
|
1
|
33.33%
|
20%
|
14.29%
|
|
2
|
44.45%
|
32%
|
24.49%
|
|
3
|
14.81%
|
19.2%
|
17.49%
|
|
4
|
7.41%
|
11.52%
|
12.49%
|
|
5
|
|
11.52%
|
8.93%
|
|
6
|
|
5.76%
|
8.92%
|
|
7
|
|
|
8.93%
|
|
8
|
|
|
4.46%
|
21. A stock has an expected return of 11 percent, the risk-free rate is 5.2 percent, and the market risk premium is 5 percent. What is the stock's beta?