1.

Net present value involves discounting an investment's:

A) assets.
B) future profits.
C) liabilities.
D) costs.
E) future cash flows.

Answer:

2. The payback period is the length of time it takes an investment to generate sufficient cash
flows to enable the project to:
A) produce a positive annual cash flow.
B) produce a positive cash flow from assets.
C) offset its fixed expenses.
D) offset its total expenses.
E) recoup its initial cost.

Answer:

3. The internal rate of return is the:

A) discount rate that causes a project's aftertax income to equal zero.
B) discount rate that results in a zero net present value for the project.
C) discount rate that results in a net present value equal to the project's initial cost.
D) rate of return required by the project's investors.
E) project's current market rate of return.

Answer:

4. The possibility that more than one discount rate can cause the net present value of an
investment to equal zero is referred to as:
A) duplication.
B) the net present value profile.
C) multiple rates of return.
D) the AAR problem.
E) the dual dilemma.

Answer:

5. 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

Answer:
7. 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) ignores cash flows that are distant in the future.
E) is unaffected by the timing of an investment's cash flows.

Answer:

8. Which one of the following statements is correct?

A) The net present value is a measure of profits expressed in today's dollars.
B) The net present value is positive when the required return exceeds the internal rate of
return.
C) If the initial cost of a project is increased, the net present value of that project will also
increase.
D) If the internal rate of return equals the required return, the net present value will equal
zero.
E) Net present value is equal to an investment's cash inflows discounted to today's dollars.

Answer

9. A cost that should be ignored when evaluating a project because that cost has already been
incurred and cannot be recouped is referred to as a(n):
A) fixed cost.
B) forgotten cost.
C) variable cost.
D) opportunity cost.
E) sunk cost.

Answer:

10. Which one of the following terms refers to the best option that was foregone when a
particular investment is selected?
A) Side effect
B) Erosion
C) Sunk cost
D) Opportunity cost
E) Marginal cost

Answer

11. 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.

Answer:

12. A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765.
The applicable tax rate is 34 percent. What is the operating cash flow according to the tax
shield approach?
A) $21,540.09
B) $27,666.67
C) $27,157.02
D) $42,183.70
E) $39,878.84

Answer:

13. Woodland Lake Manufacturing has a new project that requires $652,000 of equipment.
What is the depreciation in Year 5 of this project if the equipment is classified as seven-year
property for MACRS purposes? The MACRS allowance percentages are as follows,
commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
A) $81,434.80
B) $58,158.40
C) $93,170.80
D) $58,223.60
E) $74,749.60

Answer:
14. A project has an initial requirement of $ 260,000 for fixed assets and $16,500 for net
working capital. The fixed assets will be depreciated to a zero book value over the four-year
life of the project and have an estimated salvage value of $50,000. All of the net working
capital will be recouped at the end of the project. The annual operating cash flow is $82,500
and the discount rate is 12 percent. What is the project's net present value if the tax rate is 21
percent?
A) $15,684.29
B) $12,345.34
C) $9,670.33
D) −$15,432.63
E) $16,343.27

Answer:

15. The variance is the average squared difference between which of the following?
A) Actual return and average return
B) Actual return and (average return/N − 1)
C) Actual return and the real return
D) Average return and the standard deviation
E) Actual return and the risk-free rate

Answer:

16. The stock of Arbitrage Training is priced at $37 per share and has a dividend yield of 2.8
percent. The firm pays constant annual dividends. What is the amount of the next dividend
per share?
A) $1.15
B) $1.77
C) $1.04
D) $0.96
E) $1.20

Answer:
17. Windsor stock has produced returns of 13.8 percent, 11.7 percent, 2.3 percent, −21.4
percent, and 8.9 percent over the past five years, respectively. What is the variance of these
returns?
A) .020574
B) .031947
C) .035682
D) .019515
E) .020016

Answer:

18. You purchased a zero coupon bond one year ago for $296.50. The market interest rate is
now 6.5 percent. If the bond had 15 years to maturity when you originally purchased it, what
is your total return to date if the face value of the bond is $1,000?
A) 37.74 percent
B) 27.40 percent
C) 23.35 percent
D) 19.95 percent
E) 32.58 percent

Answer:

19. A portfolio is:

A) a single risky security.
B) any security that is equally as risky as the overall market.
C) any new issue of stock.
D) a group of assets held by an investor.
E) an investment in a risk-free security.

Answer:

20. Which term best refers to the practice of investing in a variety of diverse assets as a
means of reducing risk?
A) Systematic
B) Unsystematic
C) Diversification
D) Security market line
E) Capital asset pricing model

Answer:
21. The amount of systematic risk present in a particular risky asset relative to that in an
average risky asset is measured by the:
A) squared deviation.
B) beta coefficient.
C) standard deviation.
D) mean.
E) variance.

Answer:

22. You own a portfolio consisting of the securities listed below. The expected return for
each security is as shown. What is the expected return on the portfolio?

Number Price per

Stock of Shares share Expected Return
A 175 $ 9 11.2%
B 250 18 16.4%
C 400 56 8.7%
D 225 39 24.5%

A) 13.81 percent
B) 12.91 percent
C) 13.28 percent
D) 14.14 percent
E) 13.46 percent

Answer

23. Given the following information, what is the variance of the returns on a portfolio that is
invested 40 percent in both Stocks A and B, and 20 percent in Stock C?

Rate of Return if State Occurs:

State of Probability of Stock A Stock B Stock C
Economy State Occurring (%) (%) (%)
Boom .08 15.8 9.4 21.2
Normal .92 10.6 6.8 10.4

A) .000602
B) .001490
C) .000513
D) .000205
E) .001143
24. Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate
of return that he and the other lenders require is referred to as the:
A) pure play cost.
B) cost of debt.
C) weighted average cost of capital.
D) subjective cost.
E) cost of equity.

Answer:

25. Ted is trying to decide what cost of capital he should assign to a project. Which one of the
following should be his primary consideration in this decision?
A) Amount of debt used to finance the project
B) Use, or lack, of preferred stock as a financing option
C) Mix of funds used to finance the project
D) Risk level of the project
E) Length of the project's life

Answer:

26. Gulf Coast Tours currently has a weighted average cost of capital of 12.4 percent based
on a combination of debt and equity financing. The firm has no preferred stock. The current
debt-equity ratio is .47 and the aftertax cost of debt is 6.1 percent. The company just hired a
new president who is considering eliminating all debt financing. All else constant, what will
the firm's cost of capital be if the firm switches to an all-equity firm?
A) 15.45 percent
B) 12.92 percent
C) 12.89 percent
D) 13.37 percent
E) 15.36 percent

Answer:

27. Dee's Dress Emporium has 50,000 shares of common stock outstanding at a price of $27
a share. It also has 1000 shares of preferred stock outstanding at a price of $20 a share. There
are 800 bonds outstanding that have a semiannual coupon payment of $25. The bonds mature
in four years, have a face value of $1,000, and sell at 97 percent of par. What is the capital
structure weight of the common stock?
A) 48.20 percent
B) 50.00 percent
C) 48.15 percent
D) 62.91 percent
E) 50.08 percent

Answer:

28. An initial public offering refers to:

A) the shares held by a firm's founder.
B) the most recently issued shares that were offered to the firm's existing shareholders.
C) any shares issued to the public on a cash basis.
D) the first sale of equity shares to the general public.
E) all shares issued prior to the firm going public.

Answer: