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 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

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 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 consideringthe 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. (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?