# 1. If an investment is producing a return that is equal to the required return, the investmentâ??s n

1. If an investment is

producing a return that is equal to the required return, the investmentâ€™s net

present value will be:

A. positive.

B. greater than the projectâ€™s

initial investment.

C. zero.

D. equal to the projectâ€™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

firmâ€™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 firmâ€™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 projectâ€™s initial cost

D. Rate of return required by the

projectâ€™s investors

E. The projectâ€™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

investmentâ€™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 firmâ€™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 securityâ€™s total

risk

C. Diversifiable risk

D. Asset specific risk

E. Risk unique to a firmâ€™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

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

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.

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%

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

(10 points) R.S.

Green has 250,000 shares of common stock outstanding at a market price of

$28 a share. Next yearâ€™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 companyâ€™s tax rate is

34 percent. What is the firmâ€™s weighted average cost of capital?

19. Chance, Inc. is consideringthe following two mutually exclusive

projects with similar risks:

Year

Project A

Project B

0

â€“ $48,000

â€“ $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. (10 points) 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%

(10 points) 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?