busn379 final

1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)

sunk costs should be included
erosion effects should not be considered
financing costs need to be included
opportunity costs are relevant

2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4)

payback ignores the time value of money.
payback can be used in conjunction with time adjusted methods of evaluation.
payback is easy to use and to understand.
none of the above is a disadvantage.

3. (TCO 3 and 4) A net present value of zero implies that an investment: (Points : 4)

has no initial cost.
has an expected return that is less than the required return.
should be rejected even if the discount rate is lowered.
never pays back its initial cost.
is earning a return that exactly matches the requirement.

4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent?

Year	0	1	2	3	4
Cash flow	-$32,000	$9,000	$10,000	$15,200	$7,800

(Points : 4)

$1,085.25
$1,193.77
$3,498.28
$4,102.86
$4,513.15

5. (TCO 4) Howard Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? (Points : 4)

5.81 years
6.05 years
6.96 years
7.90 years
This project never pays back

6. (TCO 4) Ignoring the option to expand: (Points : 4)

overestimates the internal rate of return on a project.
ignores the possibility that a negative net present value project might be positive, given changes over time.
ignores the possibility that one variable is the primary source of the forecasting risk associated with a project.
underestimates the net present value of a project.

7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4)

contingency planning.
hard rationing.
soft rationing.
capital constraint.
scenario analysis.

8. (TCO 3 and 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)

The net present value of the project is $11,000
This project should be accepted because it has a negative net present value
This project should be accepted because it has a payback higher than 3 years
The net present value of the project is close to $1,000

9. (TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the second year depreciation amount under MACRS? (Points : 4)

$12,000
$19,200
$19,800
None of the above

10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4)

$82,000
$110,000
$42,000
none of these

11. (TCO 8) Which of the following factors will affect the expected rate of return on a security? (Points : 4)

multiple states of the economy
probability of occurrence for any one economic state
market rate of return given a particular economic state
all of the above will affect the expected rate of return

12. (TCO 8) Which statement is true regarding risk? (Points : 4)

the expected return is usually the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can always be decreased or mitigated by the financial manager
the higher the risk, the lower the return investors require for the investment

13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy	Probability of State of Economy	Rate of Return
Recession	.02	-.06
Normal	.88	.11
Boom	.10	.17

(Points : 4)

7.33 percent
9.82 percent
11.26 percent
11.33 percent
11.50 percent

14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? (Points : 4)

17.68 percent
17.91 percent
18.42 percent
19.07 percent
19.46 percent

15. (TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate? (Points : 4)

1.0 percent
1.8 percent
2.3 percent
2.5 percent
3.1 percent

1. (TCO 8) Weak form market efficiency states that the value of a security is based on: (Points : 4)

all public and private information.
historical information only.
all publicly available information.
all publicly available information, plus any data that can be gathered from insider trading.
random information with no clear distinction as to the source of that information.

2. (TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm’s capital structure. What is the weighted average cost of capital? (Points : 4)

between 3 and 9%
exactly 12%
more than 14%
exactly 11%
none of the above

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busn379 final

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