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14) Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A 0.17 B -73 30 30 30 30 0.17 The net present value (NPV) of project B is closest to ________. A) 9.3 B) 10.2 C) 11.6 D) 23.2

21) Independent risk is more closely related to ________. A) unsystematic risk B) systematic risk C) common risk D) diversification risk

21) Which of the following is an example of cannibalization? A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. B) A grocery store begins selling T-shirts featuring the local universityʹs mascot. C) A basketball manufacturer adds basketball hoops to its product line. D) A convenience store begins selling pre-paid cell phones.

21. Changes in the net working capital requirements: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.

21. Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? A. Project A only B. Project B only C. Both A and B D. Neither A nor B E. Answer cannot be determined based on the information given.

26) Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year 0 1 2 3 Sales (Revenues) $150,000 $150,000 $150,000 - Cost of Goods Sold (50% of Sales) 75,000 75,000 75,000 - Depreciation 20,000 20,000 20,000 = EBIT 55,000 55,000 55,000 - Taxes (35%) 19,250 19,250 19,250 = unlevered net income 35,750 35,750 35,750 + Depreciation 20,000 20,000 20,000 +/(-) increase/(decrease) in working capital 5,000 5,000 -10,000 - capital expenditures -$90,000 The free cash flow for the last year of Epiphanyʹs project is closest to ________. A) $65,750 B) $59,175 C) $49,313 D) $52,600

27) The standard deviation of returns of ________. I. small stocks is higher than that of large stocks II. large stocks is lower than that of corporate bonds III. corporate bonds is higher than that of Treasury bills Which statement is true? A) I and III B) I, II, and III C) I and II D) I only

27. Which one of the following is an advantage of the average accounting return method of analysis? A. easy availability of information needed for the computation B. inclusion of time value of money considerations C. the use of a cutoff rate as a benchmark D. the use of pre-tax income in the computation E. use of real, versus nominal, average income

3) A portfolio of stocks can achieve diversification benefits if the stocks that comprise the portfolio are ________. A) not perfectly positively correlated B) perfectly correlated C) susceptible to common risks only D) both B and C

3) An orcharder spends $110,000 to plant pomegranate bushes. It will take four years for the bushes to provide a usable crop. He estimates that every year for 20 years after that he will receive a crop worth $10,500 per year. If the discount rate is 9%, what is the net present value (NPV) of this investment? A) -$42,098 B) -$21,049 C) $8420 D) $12,629

4) In general, it is possible to eliminate ________ risk by holding a large portfolio of assets. A) unsystematic B) systematic C) unsystematic and systematic D) market specific

56. Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

66. The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 32 percent in comparison to 14 percent in a normal economy and a negative 28 percent in a recessionary period. The probability of a recession is 25 percent while the probability of a boom is 10 percent. What is the standard deviation of the returns on this stock? A. 19.94 percent B. 21.56 percent C. 25.83 percent D. 32.08 percent E. 39.77 percent

69. You own the following portfolio of stocks. What is the portfolio weight of stock C? A. 39.85 percent B. 42.86 percent C. 44.41 percent D. 48.09 percent E. 52.65 percent

Rational investors ________ fluctuations in the value of their investments.

Are averse to

101. What is the expected return of an equally weighted portfolio comprised of the following three stocks? A. 16.33 percent B. 18.60 percent C. 19.67 percent D. 20.48 percent E. 21.33 percent

13) IGM Realty had stock prices of $33, $33, $38, $36, and $28 at the end of the last five quarters. If IGM pays a dividend of $1 at the end of each quarter, what is the annual realized return on IGM? A) -5.62% B) -4.49% C) -4.72% D) -4.94%

3. The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period.

How does the capital budgeting process begin?

By compiling a list of potential projects

65. Peterborough Trucking just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $9,800. What is the amount of the depreciation expense in year 3? A. $537.52 B. $1,347.17 C. $1,451.38 D. $1,929.11 E. $2,177.56

65. The rate of return on the common stock of Lancaster Woolens is expected to be 21 percent in a boom economy, 11 percent in a normal economy, and only 3 percent in a recessionary economy. The probabilities of these economic states are 10 percent for a boom, 70 percent for a normal economy, and 20 percent for a recession. What is the variance of the returns on this common stock? A. 0.002150 B. 0.002606 C. 0.002244 D. 0.002359 E. 0.002421

For an unlevered firm, the cost of capital of the firm can be determined by using the

Capital Asset Pricing Model

6) Which of the following decision rules might best be used as a supplement to net present value (NPV) by a firm that favors liquidity?

7) A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000 . What is the EBIT break-even point for the number of games sold in this case?

80. What is the beta of the following portfolio? A. 1.04 B. 1.07 C. 1.13 D. 1.16 E. 1.23

Which of the following statements is FALSE? A) A stock's return is perfectly positively correlated with itself. B) When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C) The closer the correlation is to -1, the more the returns tend to move in opposite directions. D) The variance of a portfolio depends only on the variance of the individual stocks.

D) The variance of a portfolio depends only on the variance of the individual stocks. -Variance AND correlations

92. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent? A. A B. B C. C D. D E. E

__________________ is the maximum growth rate a firm can achieve without resorting to external financing

Internal growth rate

We can reduce volatility by investing in less than perfectly correlated assets through diversification because the expected return of a portfolio is the weighted average of the expected returns of its stock, but the volatility of a portfolio is ?

Less than the weighted average volatility

Companies that sell household products and food have very little relation to the state of the economy because such basic needs do not go away. These stocks tend to have _______ betas.

Low

1) On average, stocks have delivered higher returns than bonds in the long run.

TRUE

1) The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

TRUE

Which best defines incremental earnings?

The amount by which a firm's earnings are expected to change as the result of an investment decision

What is the ultimate goal of the capital budgeting process?

To determine the effect of the decision to accept or reject a project on the firm's cash flow

In general, it is possible to eliminate ________ risk by holding a large portfolio of assets.

Unsystematic

15. Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? A. reduction in the cash outflow at time zero B. cash inflow in the final year of the project C. cash inflow for the year following the final year of the project D. cash inflow prorated over the life of the project E. not included in the net present value

16) Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 20% probability that they will have a 20% return and a 80% probability that they will have a -30% return. What is the expected return for an individual firm? A) -12% B) -20% C) 10% D) 20%

16) Consider the following two projects: Project Year 0 C/F Year 1 C/F Year 2 C/F Year 3 C/F Year 4 C/F Year 5 C/F Year 6 C/F Year 7 C/F Discount Rate Alpha -79 20 25 30 35 40 N/A N/A 12% Beta -80 25 25 25 25 25 25 25 13% The net present value (NPV) for project alpha is closest to ________. A) $31.35 B) $25.08 C) $37.62 D) $21.32

16) The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisypheanʹs marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the companyʹs new project? A) $1,080,000 B) $1,260,000 C) $1,890,000 D) $1,134,000

17) The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years? A) -5% B) 0% C) 5% D) 3%

17) Which of the following statements is FALSE? A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. B) An internal rate of return (IRR) will always exist for an investment opportunity. C) A net present value (NPV) will always exist for an investment opportunity. D) In general, there can be as many internal rates of return (IRRs) as the number of times the projectʹs cash flows change sign over time.

18) Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return. The standard deviation for the return on an portfolio of 20 type S firms is closest to ________. A) 13.75% B) 22.91% C) 5.00% D) 4.58%

18) Which of the following statements is FALSE? A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV). B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital. C) For most investment opportunities, expenses occur initially and cash is received later. D) Fifty percent of firms surveyed reported using the payback rule for making decisions.

19) Consider a project with the following cash flows: Year Cash Flow 0 -12,000 1 5000 2 5000 3 5000 4 5000 Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________. A) 2.88 years B) 2.40 years C) 1.92 years D) 3.60 years

1. A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? A. net present value B. internal return C. payback value D. profitability index E. discounted payback

1. The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows.

10) A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the companyʹs marginal tax rate is 40%, how will the purchase of this item change the companyʹs free cash flows in the first year? A) $10.756 million B) $10.380 million C) $9.680 million D) $11.832 million

10) Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -1.46% B) 2.91% C) 0.00% D) 1.46%

10) Many former employees at AlphaEnergy, an energy trading and supply company, had a large part of their portfolio invested in AlphaEnergyʹs stock. These employees were bearing a high degree of ________ risk. A) unsystematic B) systematic C) market-specific D) non-diversifiable

10) Which of the following should be done by a manager wishing to raise his stockʹs price? I. Focus on maximizing the present value (PV) of the free cash flow. II. Focus on accounting earnings. III. Focus on financial policy. A) I only B) II only C) I and II D) II and II

104. A 4-year project has an initial asset investment of $306,600, and initial net working capital investment of $29,200, and an annual operating cash flow of -$46,720. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 15 percent. What is the project's equivalent annual cost, or EAC? A. -$158,491 B. -$152,309 C. -$147,884 D. -$145,509 E. -$142,212

105. A stock has a beta of 1.2 and an expected return of 17 percent. A risk-free asset currently earns 5.1 percent. The beta of a portfolio comprised of these two assets is 0.85. What percentage of the portfolio is invested in the stock? A. 71 percent B. 77 percent C. 84 percent D. 89 percent E. 92 percent

105. Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years, and you've decided to bid on the contract. It will cost you $1,170,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in 7 years, this equipment can be salvaged for $75,000. Your fixed production costs will be $360,000 per year, and your variable production costs should be $12.75 per carton. You also need an initial investment in net working capital of $112,500, all of which will be recovered when the project ends. Your tax rate is 32 percent and you require a 13 percent return on your investment. What bid price per carton should you submit? A. $17.04 B. $16.56 C. $15.79 D. $15.03 E. $14.81

11) A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend $4 million promoting this product this year, which is expected to expand the sales of this product to $11 million this year and $8 million next year. They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger ale. The gross profit margin for the new ginger ale is 40%, the gross profit margin of all of the brewerʹs other products is 30%, and the brewerʹs marginal corporate tax rate is 35%. What are incremental earnings arising from the promotional campaign this year? A) $1.625 million B) $1.26 million C) $2.11 million D) $4.40 million

11) Amazon.com stock prices gave a realized return of 15%, 15%, -15%, and -15% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) -4.45% B) -7.12% C) -5.12% D) 0%

11) Consider the following average annual returns: Investment Average Return Small Stocks 23.8% S&P 500 13.1% Corporate Bonds 7.5% Treasure Bonds 6.8% Treasury Bills 4.9% What is the excess return for corporate bonds? A) 2.6% B) 1.3% C) 5.2% D) 0%

11) Which of the following is NOT a diversifiable risk? A) the risk that oil prices rise, increasing production costs B) the risk that the CEO is killed in a plane crash C) the risk of a key employee being hired away by a competitor D) the risk of a product liability lawsuit

12) If you want to value a firm but do not want to explicitly forecast its dividends, the simplest model for you to use is ________. A) the discounted free cash flow model B) the dividend-discount model C) the enterprise value model D) None of the above models can be used if you do not want to forecast dividends or use of debt.

12) Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%? Rule I: The Net Present Value rule Rule II: The Payback Rule with a payback period of two years Rule III: The internal rate of return (IRR) Rule A) Rule I only B) Rule III only C) Rule II and III D) Rule I and II

12) Year Cash Flow 0 -12,000 1 3000 2 3000 3 3000 4 3000 Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________. A) $0 B) $12,000 C) 23% D) 19%

13) Year 0 Year 1 Year 2 Year 3 Revenues 363,688.342 363,688.342 363,688.342 - Cost of Goods Sold -150,000 -150,000 -150,000 - Depreciation -80,000 -80,000 -80,000 = EBIT 133,688.342 133,688.342 133,688.342 - Taxes (35%) -46,790.9196 - 46,790.9196 - 46,790.9196 = Unlevered net income 86,897.4221 86,897.4221 86,897.4221 + Depreciation 80,000 80,000 80,000 - Additions to Net Working Capital -20,000 -20,000 -20,000 - Capital Expenditures -300,000 = Free Cash Flow 146,897.422 146,897.422 146,897.422 Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. By how much could the discount rate rise before the net present value (NPV) of this project is zero, given that it is currently 10%? A) 12% B) 17% C) 27% D) 22%

13) Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A 0.11 B -73 30 30 30 30 0.11 The net present value (NPV) of project A is closest to ________. A) 20.5 B) 22.5 C) 25.6 D) 51.2

13) Which of the following statements is FALSE? A) On average, larger stocks have higher volatility than smaller stocks. B) Portfolios of large stocks are typically less volatile than individual large stocks. C) On average, smaller stocks have higher returns than larger stocks. D) On average, Treasury Bills have lower returns than corporate bonds.

13) Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $130,000 ; however, a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land would be willing to pay $700,000 for it. When calculating the net present value (NPV) of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is ________. A) $700,000 B) $0 C) $130,000 D) $830,000

13. Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? A. net present value B. discounted payback C. internal rate of return D. profitability index E. payback

15) The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $420,000 . The Sisyphean Company expects cash inflows from this project as detailed below: Year 1 Year 2 Year 3 Year 4 $200,000 $225,000 $275,000 $200,000 The appropriate discount rate for this project is 16%. The net present value (NPV) for this project is closest to ________. A) $206,265 B) $144,385 C) $515,661 D) $216,578

15) Which of the following statements is FALSE? A) As the enterprise value represents the entire value of a firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made. B) We can compute a firmʹs price-earnings ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing price-earnings or forward price-earnings. C) It is common practice to use valuation multiples based on a firmʹs enterprise value. D) Using a valuation multiple based on comparables is best viewed as a ʺshortcutʺ to the discounted cash flow method of valuation.

15) Which of the following statements is FALSE? A) The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero. B) The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. C) When evaluating a capital budgeting project, financial managers should make the decision that maximizes net present value (NPV). D) Sensitivity analysis reveals those aspects of the project which are most critical when we are actually managing the project.

15) You are considering adding a microbrewery onto one of your firmʹs existing restaurants. This will entail an investment of $47,000 in new equipment. This equipment will be depreciated straight-line over five years. If your firmʹs marginal corporate tax rate is 35%, then what is the value of the microbreweryʹs depreciation tax shield in the first year of operation? A) $3290 B) $16,450 C) $6110 D) $30,550

17) Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 40% probability that the firm will have a 20% return and a 60% probability that the firm will have a -30% return. The standard deviation for the return on an individual firm is closest to ________. A) 24.49% B) -10.00% C) 12.25% D) 9.80%

17) Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $30 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to ________. A) $15.0 million B) $9.0 million C) $33.0 million D) $24.0 million

17) The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2500 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $16 each and is to remain constant. The canes have a cost per unit to manufacture of $10 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%. The required net working capital in the first year for the Sisyphean Corporationʹs project is closest to ________. A) $5200 B) $5668 C) -$2800 D) $9200

17. Net present value: A. is the best method of analyzing mutually exclusive projects. B. is less useful than the internal rate of return when comparing different sized projects. C. is the easiest method of evaluation for non-financial managers to use. D. is less useful than the profitability index when comparing mutually exclusive projects. E. is very similar in its methodology to the average accounting return.

18) Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $175,000 per year. FFL currently offers overnight film processing with annual sales of $90,000 . While many of the one-hour photo sales will be to new customers, FFL estimates that 40% of their current overnight photo customers will switch and use the one-hour service. The level of incremental sales associated with introducing the new one hour photo service is closest to ________. A) $139,000 B) $175,000 C) $36,000 D) $70,000

2) An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

2) Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking? A) option to delay B) option to expand C) option to abandon D) option to switch

22) Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $21 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSIʹs marginal tax rate is 35% Assume that THSIʹs cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to ________. A) $2,956,522 B) -$9.15 C) $5,913,044 D) -$2,956,522

24) Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? A) 5.77% B) 5.20% C) 6.06% D) 4.62%

25. Applying the discounted payback decision rule to all projects may cause: A. some positive net present value projects to be rejected. B. the most liquid projects to be rejected in favor of the less liquid projects. C. projects to be incorrectly accepted due to ignoring the time value of money. D. a firm to become more long-term focused. E. some projects to be accepted which would otherwise be rejected under the payback rule.

3) On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11 . Its competitor, UPS, had an EPS of $0.38 . What would be the expected price of UPS stock on this date, if estimated using the method of comparables? A) $4.77 B) $7.16 C) $9.54 D) $10.50

3) Rational investors ________ fluctuations in the value of their investments. A) are averse to B) prefer C) are indifferent to D) are in favor of

3) The term ʺcannibalizationʺ refers to ________. A) decrease in the sales of current project caused by the launching of new project B) decrease in the sunk cost caused by launching of new project C) decrease in overhead expenses incurred due to launch of new project D) cost of using a resource for the best value it could provide in its best alternative

3) Year 1 2 3 4 Free Cash Flow $12 million $18 million $22 million $26 million Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 11% and Conundrum has cash of $85 million, debt of $65 million, and 30 million shares outstanding, what is Conundrumʹs expected current share price? A) $12.61 B) $16.40 C) $20.18 D) $20.81

30) If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________. A) 50% B) 25% C) 46% D) 33%

34) The average annual return for the S&P 500 from 1886 to 2006 is 15%, with a standard deviation of 25%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -35%, 65% B) -17.5%, 32.5% C) -25%, 55% D) -20%, 50%

36. The top-down approach to computing the operating cash flow: A. ignores noncash expenses. B. applies only if a project increases sales. C. applies only to cost cutting projects. D. is equal to sales - costs - taxes + depreciation. E. is used solely to compute a bid price.

37) If a stock pays dividends at the end of each quarter, with realized returns of R1, R2, R3, and R4 each quarter, then the annual realized return is calculated as ________. A) Rannual = (1 + R1) (1 + R2) (1 + R3)( 1 + R4) - 1 B) Rannual = R1 + R2 + R3 + R4 C) Rannual = (1 + R1) (1 + R2)( 1 + R3)( 1 + R4) D) Rannual = R1 + R2 + R3 + R4 4

4) A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation. The $20 million should best be considered ________. A) as a sunk cost B) as an opportunity cost C) as a fixed overhead expense D) as a capital cost

4) A study of trading behavior of individual investors at a discount brokerage found that individual investors ________. A) trade very actively, despite the fact that their performance is actually worse because of trading costs B) trade very conservatively, despite the fact that their performance is actually worse because of trading costs C) trade very actively, partly because their performance is better than the professionalsʹ due to low trading costs D) trade very conservatively, partly because their performance is better than the professionalsʹ due to low trading costs

4) Greg purchased stock in Bear Stearns and Co. at a price of $88 per share one year ago. The company was acquired by JP Morgan at a price of $11 per share. What is Gregʹs return on his investment? A) -87.50% B) -113.75 % C) -100.62 % D) -96.25%

4) Stocks with high returns are expected to have ________. A) high variability B) low variability C) no relation to variability D) inverse relationship with variability

4) The present value (PV) of an investment is ________. A) the amount that an investment would yield if the benefit were realized today B) the difference between the cost of the investment and the benefit of the investment in dollars today C) the amount you need to invest at the current interest rate to re-create the cash flow from the investment D) the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

4) Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on ________. A) Machine A B) Machine B C) does not matter D) none of the above

4) While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return. A) volatility, volatility B) the mean return, standard deviation C) mode, volatility D) mode, mean return

4) Year 1 2 3 4 5 Free Cash Flow $22 million $26 million $29 million $30 million $32 million General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industriesʹ expected current share price? A) $7.78 B) $8.17 C) $9.34 D) $11.67

42) Consider the following realized annual returns: Year-end S&P 500 Realized Return IBM Realized Return 1996 23.3% 46.3% 1997 24.7% 26.7% 1998 30.4% 86.9% 1999 9.0% 23.1% 2000 -2.0% 0.2% 2001 -17.3% -3.2% 2002 -24.3% -27.0% 2003 31.2% 27.9% 2004 4.4% -5.1% 2005 7.4% -11.3% The average annual return on the S&P 500 from 1996 to 2005 is closest to ________. A) 8.68% B) 4.34% C) 5.21% D) 9.55%

5) Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected terminal enterprise value in year 2? A) $1384.24 B) $1245.82 C) $1107.39 D) $968.97

5) Historically, stocks have delivered a ________ return on average compared to Treasury bills but have experienced ________ fluctuations in values. A) higher, higher B) higher, lower C) lower, higher D) lower, lower

77. What is the standard deviation of the returns on a portfolio that is invested 52 percent in stock Q and 48 percent in stock R? A. 1.66 percent B. 2.47 percent C. 2.63 percent D. 3.28 percent E. 3.41 percent

78. Champion Bakers uses specialized ovens to bake its bread. One oven costs $689,000 and lasts about 4 years before it needs to be replaced. The annual operating cost per over is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent? A. -$272,638 B. -$248,313 C. -$232,407 D. -$200,561 E. $196,210

79. Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $892,000, annual operating costs of $26,300, and a 4-year life. Machine B costs $1,127,000, has annual operating costs of $19,500, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life. Precision Tool should purchase Machine _____ because it lowers the firm's annual cost by approximately _______ as compared to the other machine. A. A; $16,965. B. A; $17,404 C. B; $16,965 D. B; $17,404 E. B; $17,521

17) Consider the following two projects: Project Year 0 C/F Year 1 C/F Year 2 C/F Year 3 C/F Year 4 C/F Year 5 C/F Year 6 C/F Year 7 C/F Discount Rate Alpha -79 20 25 30 35 40 N/A N/A 16% Beta -80 25 25 25 25 25 25 25 17% The net present value (NPV) for project beta is closest to ________. A) $21.67 B) $14.45 C) $18.06 D) $12.64

19. Why is payback often used as the sole method of analyzing a proposed small project? A. Payback considers the time value of money. B. All relevant cash flows are included in the payback analysis. C. It is the only method where the benefits of the analysis outweigh the costs of that analysis. D. Payback is the most desirable of the various financial methods of analysis. E. Payback is focused on the long-term impact of a project.

2) Suppose you invested $59 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of 0.38 today and then you sold it for $66. What was your return on the investment? A) 8.76% B) 13.76% C) 12.51% D) 10.01%

20) If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same. A) same as B) higher than C) lower than D) always same as

20. Which of the following are advantages of the payback method of project analysis? I. works well for research and development projects II. liquidity bias III. ease of use IV. arbitrary cutoff point A. I and II only B. I and III only C. II and III only D. II and IV only E. II, III, and IV only

22) The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $400,000 . The Sisyphean Company expects cash inflows from this project as detailed below: Year 1 Year 2 Year 3 Year 4 $157,452.975 $157,452.975 $157,452.975 $157,452.975 The appropriate discount rate for this project is 15%. The internal rate of return (IRR) for this project is closest to ________. A) 13% B) 16% C) 21% D) 24%

22. Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition

23) Bear Stearnsʹ stock price closed at $98, $103 , $58, $29, $4 over five successive weeks. The weekly standard deviation of the stock price calculated from this sample is ________. A) $30.07 B) $49.40 C) $42.96 D) $34.37

38. Which of the following statements generally apply to the cash flows of a financing type project? I. nonconventional cash flows II. cash outflows exceed cash inflows prior to any time value adjustments III. cash for services rendered is received prior to the cash that is spent providing the services IV. the total of all cash flows must equal zero on an unadjusted basis A. I only B. I and III only C. II and IV only D. I, II, and III only E. I, II, III, and IV

35. You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should: A. always accept project A. B. be indifferent to the projects at any discount rate above 13.1 percent. C. always accept project A if the required return exceeds the crossover rate. D. accept project B only when the required return is equal to the crossover rate. E. accept project B if the required return is less than 13.1 percent.

8) Year 0 Year 1 Year 2 Year 3 MACRS Depreciation Rate 33.33% 44.45% 14.81% 7.41% A fast-food company invests $2.2 million to buy machines for making slurpees. These can be depreciated using the MACRS schedule shown above. If the cost of capital is 10%, what is the increase in the net present value (NPV) of the product gained by using MACRS depreciation over straight-line depreciation for three years? A) $28,559 B) $47,599 C) $76,158 D) $190,321

24. The operating cash flow of a cost cutting project: A. is equal to the depreciation tax shield. B. is equal to zero because there is no incremental sales. C. can only be analyzed by projecting the sales and costs for a firm's entire operations. D. includes any changes that occur in the current accounts. E. can be positive even though there are no sales.

24. Which one of the following statements related to payback and discounted payback is correct? A. Payback is a better method of analysis than is discounted payback. B. Discounted payback is used more frequently in business than is payback. C. Discounted payback does not require a cutoff point like the payback method does. D. Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. E. Payback is used more frequently even though discounted payback is a better method.

25. Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

26. Which one of the following correctly applies to the average accounting rate of return? A. It considers the time value of money. B. It measures net income as a percentage of the sales generated by a project. C. It is the best method of analyzing mutually exclusive projects from a financial point of view. D. It is the primary methodology used in analyzing independent projects. E. It can be compared to the return on assets ratio.

29. Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS? A. $67,000 (1 - 0.20) 0.32 B. $67,000/(1 - 0.20 - 0.32) C. $67,000 (1 + 0.32) D. $67,000 (1 - 0.32) E. $67,000 0.32

30. The internal rate of return: A. may produce multiple rates of return when cash flows are conventional. B. is best used when comparing mutually exclusive projects. C. is rarely used in the business world today. D. is principally used to evaluate small dollar projects. E. is easy to understand.

31. The net book value of equipment will: A. remain constant over the life of the equipment. B. vary in response to changes in the market value. C. decrease at a constant rate when MACRS depreciation is used. D. increase over the taxable life of an asset. E. decrease slower under straight-line depreciation than under MACRS.

33. Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR. A. I and II only B. III and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

34. Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct? A. Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR. B. Project B should be accepted as it has the higher IRR. C. Both projects should be accepted as both of the project's IRRs exceed the crossover rate. D. Neither project should be accepted since both of the project's IRRs exceed the crossover rate. E. You cannot determine which project should be accepted given the information provided.

37. Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? A. erosion effects B. taxes C. fixed expenses D. salaries E. depreciation expense

4. The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the: A. net present value period. B. internal return period. C. payback period. D. discounted profitability period. E. discounted payback period.

40. The equivalent annual cost method is useful in determining: A. which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. the operating cash flows of a cost-cutting project. D. which one of two investments to accept when the investments have different required rates of return. E. which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

42. The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. aftertax salvage value A. I and II only B. II and IV only C. II, III, and IV only D. I, II, and IV only E. I, II, III, and IV

42. Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? A. net present value B. payback C. internal rate of return D. average accounting return E. profitability index

44. Which one of the following is the best example of two mutually exclusive projects? A. building a retail store that is attached to a wholesale outlet B. producing both plastic forks and spoons on the same assembly line at the same time C. using an empty warehouse to store both raw materials and finished goods D. promoting two products during the same television commercial E. waiting until a machine finishes molding Product A before being able to mold Product B

56. Marie's Fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets. The project is expected to produce annual sales of $75,000 with associated costs of $57,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 30 percent. What is the operating cash flow for this project? A. -$1,520 B. -$580 C. $420 D. $15,680 E. $17,820

63. Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $87,000. What will the accumulated depreciation be at the end of year three? A. $13,520 B. $25,056 C. $38,241 D. $48,759 E. $61,944

67. You own some equipment that you purchased 4 years ago at a cost of $216,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $75,500. Which one of the following statements is correct if your tax rate is 35 percent? A. The tax due on the sale is $26,425. B. The book value today is $178,675.20. C. The accumulated depreciation to date is $37,324.80. D. The taxable amount on the sale is $37,324.80. E. The aftertax salvage value is $62,138.68.

69. Bruno's Lunch Counter is expanding and expects operating cash flows of $26,000 a year for 4 years as a result. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $3,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 16 percent? A. $18,477.29 B. $21,033.33 C. $28,288.70 D. $29,416.08 E. $32,409.57

74. Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not? A. No; The NPV is -$172,937.49. B. No; The NPV is -$87,820.48. C. Yes; The NPV is $251,860.34 D. Yes; The NPV is $387,516.67 E. Yes; The NPV is $466,940.57

74. What is the expected return on a portfolio comprised of $6,200 of stock M and $4,500 of stock N if the economy enjoys a boom period? A. 10.93 percent B. 11.16 percent C. 12.55 percent D. 13.78 percent E. 15.43 percent

If a manager wishes to raise his stock's price, he should do?

Focus on maximizing the present value (PV) of the free cash flow

Long term financial planning allows a financial manager to understand the business by __________ between sales, costs, capital investments, and financing

Identifying the linkages

A company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for sales price for the motor scooter is $2480. What does that mean?

If the motor scooter is sold for $2480, then the NPV for the project will be zero

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is:

Net present value (NPV)

A portfolio of stocks can achieve diversification benefits if the stocks that comprise portfolios are?

Not perfectly correlated

Most corporations measure the value of a project in terms of which of the following?

Present Value (PV)

38) Consider the following price and dividend data for Quicksilver Inc.: Date Price ($) Dividend ($) December 31, 2004 $14.88 January 26, 2005 $13.61 $0.11 April 28, 2005 $9.14 $0.11 July 29, 2005 $10.74 $0.11 October 28, 2005 $8.02 $0.11 December 30, 2005 $7.72 Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your dividend yield for this period is closest to ________. A) -7.80% B) -8.53% C) 0.74% D) 0.81%

39) Consider the following price and dividend data for Quicksilver Inc.: Date Price ($) Dividend ($) December 31, 2004 $14.01 January 26, 2005 $13.47 $0.13 April 28, 2005 $9.14 $0.13 July 29, 2005 $10.74 $0.13 October 28, 2005 $8.02 $0.13 December 30, 2005 $7.72 Assume that you purchased Quicksilverʹs stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your capital gains rate (yield) for this period is closest to ________. A) 0.93% B) 1.02% C) -3.85% D) -2.93%

39. Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A. internal rate of return B. operating cash flow C. equivalent annual cost D. depreciation tax shield E. bottom-up operating cash flow

4) According to Graham and Harveyʹs 2001 survey (Figure 8.2 in the text), the most popular decision rules for capital budgeting used by CFOs are ________. A) NPV, IRR, MIRR B) MIRR, IRR, Payback period C) IRR, NPV, Payback period D) Profitability index, NPV, IRR

4) Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2? A) $835,000 B) $2,665,000 C) $2,434,000 D) $831,667

3) When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV) to the net present value (NPV)? A) so that you can see which project has the greatest net present value (NPV) B) so that the projects can be compared on their cost or value created per year C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

30) A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firmʹs marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine? A) $80,000 B) $31,200 C) $28,080 D) $156,000

30. The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. depreciation tax shield B. tax due on the salvage value of that asset C. current year's operating cash flow D. change in net working capital E. MACRS depreciation for the current year

35. The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for a project. E. both taxes and the interest expense are equal to zero.

4) Which of the following statements concerning the valuation of firms using the method of comparables is FALSE? A) If two different firms generate identical cash flows, the Law of One Price will imply that both firms have the same value. B) Comparables adjust for scale differences when valuing similar firms. C) Valuation multiples take into account differences in the risk and future growth between the firms being compared. D) Two firms that sell very similar products or offer very similar services will have different values if they are of different sizes.

43. The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.

44) The average annual return over the period 1926-2009 for the S&P 500 is 12.0%, and the standard deviation of returns is 21.3%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -1.5%, 21.8% B) -10.7%, 32.8% C) -30.6%, 54.6% D) -30.6%, 76.4%

44. Which one of the following would make a project unacceptable? A. cash inflow for net working capital at time zero B. requiring fixed assets that would have no salvage value C. an equivalent annual cost that exceeds that of an alternative project D. lack of revenue generation E. a depreciation tax shield that exceeds the value of the interest expense

55. The capital asset pricing model (CAPM) assumes which of the following? I. a risk-free asset has no systematic risk. II. beta is a reliable estimate of total risk. III. the reward-to-risk ratio is constant. IV. the market rate of return can be approximated. A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

6) As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ________. A) increases B) remains unchanged C) decreases D) doubles

6) The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken? A) Year: 0 1 2 3 4 5 Cash flow: -$5000 $2000 $2000 $2000 $2000 $2000 Cost of Capital: 6.0% B) Year: 0 1 2 3 4 5 Cash flow: -$6000 $2500 $2500 $2500 $2500 2,500 Cost of Capital: 7.5% C) Year: 0 1 2 3 4 5 Cash flow: -$7000 $3000 $3000 $3000 $3000 $3000 Cost of Capital: 7.5% D) Year: 0 1 2 3 4 5 Cash flow: -$8000 $3200 $3200 $3200 $3200 $3200 Cost of Capital: 9.2%

6) Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile? A) They do not tell how the decision affects the firmʹs reported profits from an accounting perspective. B) They are not easily predicted from historical financial statements of a firm and its competitors. C) These earnings are not actual cash flows. D) They do not show how the firmʹs earnings are expected to change as the result of a particular decision.

6) Which of the following is the best statement of the efficient markets hypothesis? A) Investors with information that a stock had a positive net present value (NPV) will buy it, while investors with information that a stock had a negative net present value (NPV) will sell it. B) Investorʹs decisions are dependent on complete current information of a firmʹs cash flows and accurate predictions of future cash flows. C) Competition between investors works to make the net present value (NPV) of all trading opportunities zero. D) A shareʹs price is the aggregate of the information of many investors

6. Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values

60. You recently purchased a stock that is expected to earn 22 percent in a booming economy, 9 percent in a normal economy, and lose 33 percent in a recessionary economy. There is a 5 percent probability of a boom and a 75 percent chance of a normal economy. What is your expected rate of return on this stock? A. -3.40 percent B. -2.25 percent C. 1.25 percent D. 2.60 percent E. 3.50 percent

61. A proposed expansion project is expected to increase sales of JL Ticker's Store by $35,000 and increase cash expenses by $21,000. The project will cost $24,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The store has a marginal tax rate of 30 percent. What is the operating cash flow of the project using the tax shield approach? A. $5,600 B. $7,800 C. $11,600 D. $13,300 E. $14,600

61. The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock? A. 8.52 percent B. 8.74 percent C. 8.65 percent D. 9.05 percent E. 9.28 percent

63. Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock? A. 6.47 percent B. 7.03 percent C. 7.68 percent D. 8.99 percent E. 9.80 percent

7) Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondaleʹs free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondaleʹs stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%? A) no effect B) rise by $5.15 C) rise by $6.43 D) rise by $7.72

7) Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 10%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected current share price? A) $14.37 B) $11.87 C) $12.49 D) $16.24

7) Which of the following statements is FALSE? A) Expected return should rise proportionately with volatility. B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. C) Smaller stocks have lower volatility than larger stocks. D) The largest stocks are typically more volatile than a portfolio of large st

7. You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph? A. project tract B. projected risk profile C. NPV profile D. NPV route E. present value sequence

76. A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and $4,100 over the next four years, respectively. What is the payback period? A. 1.73 years B. 2.51 years C. 2.94 years D. 3.51 years E. 3.94 years

76. What is the variance of the returns on a portfolio comprised of $5,400 of stock G and $6,600 of stock H? A. .000709 B. .000848 C. .001097 D. .001254 E. .001468

76. You are working on a bid to build two apartment buildings a year for the next 5 years for a local college. This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $325,000. You will also need $140,000 in net working capital over the life of the project. The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building. Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building? A. $1,423,700 B. $1,489,500 C. $1,733,000 D. $2,780,600 E. $3,465,900

8) Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash $47 Accounts payable $40 Accounts receivable 23 Total current liabilities 40 Inventories 16 Total current assets 86 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 164 Long-term debt 170 Total long-term assets 164 Total long-term liabilities 170 Total Assets 250 Total Liabilities 210 Stockholdersʹ Equity 40 Total Liabilities and Stockholdersʹ Equity 250 The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firmʹs Net Working Capital? A) $126 thousand B) $7 thousand C) $46 thousand D) $86 thousand

8) Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment? A) 1% B) 2% C) 3% D) 4%

8) The following show four mutually exclusive investments. Which one is the best investment? A) Initial investment: $1.1 million; Cash flow in year 1: $160,000; Annual Growth Rate: 2%; Cost of Capital: 9.1% B) Initial investment: $1.2 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 7.2% C) Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 5.6% D) Initial investment: $1.4 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 8.4%

14) You are considering adding a microbrewery onto one of your firmʹs existing restaurants. This will entail an increase in inventory of $8700 , an increase in accounts payables of $2300 , and an increase in property, plant, and equipment of $48,000 . All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is ________. A) $54,400 B) $11,000 C) $7680 D) $6400

1) Independent risks can be diversified by holding a large number of uncorrelated assets with independent risks.

TRUE

1) The Net Present Value rule implies that we should compare a projectʹs net present value (NPV) to zero.

TRUE

1) The discounted free cash flow model ignores interest income and expense but adjusts for cash and debt directly, if free cash flow is calculated based on EBIT

TRUE

1) When different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision rule.

TRUE

14) You purchased Alpha Innovative Inc. stock at a price of $25 per share. Its price was $15 after six months and the company declared bankruptcy at the end of the next six months. The realized return over the last year is ________. A) -99% B) -75% C) -150% D) -100%

16) The S&P 500 index delivered a return of 10%, 15%, 15%, and -30% over four successive years. What is the arithmetic average annual return for four years? A) 3.00% B) 3.50% C) 2.25% D) 2.50%

16) Which of the following is NOT a valid method of modifying cash flows to produce a MIRR? A) Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. B) Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. C) Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. D) Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the projectʹs lifetime.

16) Which of the following statements is FALSE? A) Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our net present value (NPV) analysis for the project. B) To compute the net present value (NPV) for a project, you need to estimate the incremental cash flows and choose a discount rate. C) Estimates of the cash flows and cost of capital are often subject to significant uncertainty. D) When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

16. Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

16. Which one of the following increases the net present value of a project? A. an increase in the required rate of return B. an increase in the initial capital requirement C. a deferment of some cash inflows until a later year D. an increase in the aftertax salvage value of the fixed assets E. a reduction in the final cash inflow

17) Which of the following statements is FALSE? A) We can use scenario analysis to evaluate alternative pricing strategies for our project. B) Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. C) The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D) Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

18) You purchase a 30-year, zero-coupon bond for a price of $25. The bond will pay back $100 after 30 years and make no interim payments. The annual compounded return (geometric average return) on this investment is ________. A) 4.49% B) 5.68% C) 4.02% D) 4.73%

19) Suppose that a stock gave a realized return of 20% over a two-year time period and a 10% return over the third year. The geometric average annual return is ________. A) 8.28% B) 12.43% C) 14.08% D) 16.57%

20) Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 80 N/A 0.12 B -73 30 30 30 30 0.12 The payback period for project A is closest to ________. A) 1.9 years B) 2.3 years C) 2.6 years D) 2.1 years

21) Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A 0.10 B -73 25 25 25 25 0.10 The payback period for project B is closest to ________. A) 3.2 years B) 2.3 years C) 2.6 years D) 2.9 years

21) Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSIʹs marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSIʹs free cash flow for the first and only year of operation? A) $6.00 million B) $3.85 million C) $9.81 million D) $7.85 million

22) The risk premium of a stock is not affected by its ________. A) undiversifiable risk B) typical risk C) systematic risk D) unsystematic risk

22. A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B. The cash flow in year three is ignored. C. The project's cash flow in year three is discounted by a factor of (1 + R)3. D. The cash flow in year two is valued just as highly as the cash flow in year one. E. The project is acceptable whenever the payback period exceeds three years.

2) A portfolio of stocks where each stock has a large component of independent risk benefits when such stocks are held in a portfolio, because the independent risks are averaged out. This is also referred to as diversification of risks

TRUE

2) In an efficient market, investors will only find positive-NPV trading opportunities if they have some form of competitive advantage over other investors.

TRUE

2) In the United States over the long term, small stocks have provided the highest return followed by the large stocks in the S&P 500.

TRUE

2) Individual investors who grow up and live during a time of high stock returns are more likely to invest in stocks.

TRUE

2) Interest and other financing-related expenses are excluded when determining a projectʹs unlevered net income.

TRUE

2) Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

TRUE

2) Several methods should be used to provide an estimate of a stockʹs value since no single method provides a definitive value.

TRUE

3) When comparing mutually exclusive projects which have different scales, you must know the dollar impact of each investment rather than percentage returns.

TRUE

What best describes the Net Present Value rule?

Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative

What is the present value (PV) of an investment?

The amount that an investment would yield if the benefit were realized today

A firm expects growth next year to be 12%. Its sustainable growth rate is 10%. What is true?

The firm may be able to keep its debt to equity ratio the same by reducing dividends assuming they are projected to be high enough

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plan for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. Which of these activities will be reported as an operating expense?

The redesign of the plant only

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

True

The volatility of Home Depot share prices is 30% and that of General Motors shares is 30%. When I hold both stocks in my portfolio and the stocks returns have a correlation of 1, the overall volatility of returns of the portfolio is

Unchanged at 30%.

Many former employees at Enron, an energy trading and supply company, had a large part of their portfolio invested in Enron stock. These employees were bearing a high degree of ________ risk.

Unsystematic

Apple computer's stock price jumped when it announced that is revenue had increased because of the successful launch of iPad and the increased sales of macbook computers. This is an example of:

Unsystematic risk

If you diversify away all _________ risk, you will be left with __________ risk

Unsystematic, systematic

The firm's overall cost of capital that is a blend of the costs of the different sources of capital is known as the firm's

Weighted average cost of capital

Holding everything else constant, an increase in cash __________the firm's net debt.

Will decrease

When making long term plans, any increases in ________ and ________ reflect capital structure decisions that require managers to actively raise capital.

debt, equity

If you want to value a firm but do not want to explicitly forecast its dividends, what is the simplest model for you to use?

discounted free cash flow model

Stocks with higher returns are expected to have?

high variability

As a firm increases its level of debt relative to its level of equity, the firm is:

increase its leverage

The percent of sales method relies on the idea that capacity increases are ________ ,even though in practice such increases are ________.

incremental, lumpy

While the assets and accounts payable of a firm may reasonably be expected to grow with sales, ________ will not naturally grow with sales.

long-term debt

Two slot machines offer to double your money 3 times out of 5. Machine A takes $10 bets and Machine B takes $100 bets on each occasion. A risk-averse investor prefers to bet on:

machine A

The ________ method assumes that as sales grow, many income statement and balance sheet items will grow, remaining the same percent of sales.

percent of sales method

36) Which of the following statements is FALSE? A) The geometric average return is a better description of the long-run historical performance of an investment. B) The geometric average return will always be above the arithmetic average return, and the difference grows with the volatility of the annual returns. C) The compounded geometric average return is most often used for comparative purposes. D) We should use the arithmetic average return when we are trying to estimate an investmentʹs expected return over a future horizon based on its past performance

36. Graphing the crossover point helps explain: A. why one project is always superior to another project. B. how decisions concerning mutually exclusive projects are derived. C. how the duration of a project affects the decision as to which project to accept. D. how the net present value and the initial cash outflow of a project are related. E. how the profitability index and the net present value are related.

38. Which one of the following statements is correct concerning bid prices? A. The bid price is the maximum price that a firm should bid. B. A firm can submit a bid that is higher than the computed bid price and still break even. C. A bid price ignores taxes. D. A bid price should be computed based solely on the operating cash flows of the project. E. A bid price should be computed based on a zero percent required rate of return.

23) Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). Year 1 2 Revenues 1050 1425 Operating expense 375 550 Depreciation 230 280 Increase in working capital 50 80 Capital expenditures 270 320 Marginal corporate tax rate 30% 30% The depreciation tax shield for Shepard Industries project in year 1 is closest to ________. A) $84 million B) $104 million C) $83 million D) $69 million

6) Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? A) 0.54%, 1.13% B) 0.57%, 1.08% C) 0.57%, 1.13% D) 1.08%, 1.18%

62. You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities? A. -0.85 percent B. 1.95 percent C. 2.05 percent D. 13.45 percent E. 13.55 percent

64. If the economy is normal, Charleston Freight stock is expected to return 15.7 percent. If the economy falls into a recession, the stock's return is projected at a negative 11.6 percent. The probability of a normal economy is 80 percent while the probability of a recession is 20 percent. What is the variance of the returns on this stock? A. 0.010346 B. 0.011925 C. 0.013420 D. 0.013927 E. 0.014315

64. You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $147,000. What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time? A. $8,467.20 B. $25,401.60 C. $42,336.00 D. $121,598.40 E. $138,532.80

67. What is the standard deviation of the returns on a stock given the following information? A. 1.57 percent B. 2.03 percent C. 2.89 percent D. 3.42 percent E. 4.01 percent

68. You have a portfolio consisting solely of stock A and stock B. The portfolio has an expected return of 8.7 percent. Stock A has an expected return of 11.4 percent while stock B is expected to return 6.4 percent. What is the portfolio weight of stock A? A. 39 percent B. 46 percent C. 54 percent D. 61 percent E. 67 percent

23. Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

25) Ford Motor Company had realized returns of 10%, 20%, -10%, and -10% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 12.75% B) 14.25% C) 13.50% D) 15.00%

28) Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes? A) 7 years B) 2 years C) 4 years D) 5 year

28) Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. A) 1.55% B) 1.03% C) 0.90% D) 1.29%

28. Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values A. I only B. I and IV only C. II and III only D. I, II, and IV only E. I, II, III, and IV

29) A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000 . This in turn would cause inventory to increase by $125,000 , accounts receivable to increase by $100,000 , and accounts payable to increase by $90,000 . What is the firmʹs expected change in net working capital? A) $1,735,000 B) $315,000 C) $225,000 D) $135,000

3) Most corporations measure the value of a project in terms of which of the following? A) discount value B) discount factor C) future value (FV) D) present value (PV)

3) Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings? A) adding depreciation B) adding all non-cash expenses C) subtracting increases in Net Working Capital D) subtracting depreciation expenses from taxable earnings

3) Which of the following situations can lead to IRR giving a different decision than NPV? A) delayed investment B) multiple IRRs C) differences in project scale D) All of the above can lead to IRR giving a different decision than NPV.

31) The probability mass between two standard deviations around the mean for a normal distribution is ________. A) 66% B) 90% C) 75% D) 95%

34. The operating cash flow for a project should exclude which one of the following? A. taxes B. variable costs C. fixed costs D. interest expense E. depreciation tax shield

37. A project with financing type cash flows is typified by a project that has which one of the following characteristics? A. conventional cash flows B. cash flows that extend beyond the acceptable payback period C. a year or more in the middle of a project where the cash flows are equal to zero D. a cash inflow at time zero E. cash inflows which are equal in amount

11. Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

12) Time: 0 1 2 3 Investment A: -$1 million $300,000 $400,000 $500,000 Investment B: -$1 million $500,000 $400,000 $300,000 An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true? A) The investor should take investment A since it has a greater net present value (NPV). B) The investor should take investment A since it has a greater internal rate of return (IRR). C) The investor should take investment B since it has a greater net present value (NPV). D) The investor should take investment B since it has a greater internal rate of return (IRR)

13) A local government awards a landscaping company a contract worth $1.5 million per year for five years for maintaining public parks. The landscaping company will need to buy some new machinery before they can take on the contract. If the cost of capital is 6%, what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company? A) $5.69 million B) $6.00 million C) $6.32 million D) $6.63 million

13) Which of the following statements is FALSE? A) We begin the capital budgeting process by determining the incremental earnings of a project. B) The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D) The opportunity cost of using a resource is the value it could have provided in its best alternative use.

14) A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then what is the MIRR for this project? A) -60.97% B) -78.39% C) -87.10% D) -95.81%

15) The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the arithmetic average annual return for four years? A) 10.50% B) 13.13% C) 8.75% D) 9.63%

15. Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather

Which accounts may be reasonably be expected to grow with sales:

Accounts receivable, accounts payable, and inventory

Building a model for long-term forecasting reveals points in the future where the firm will need ________ when retained earnings are not enough to fund planned future investments.

External financing

3) Investors should earn a risk premium for bearing unsystematic risk

FALSE

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?

Subtracting depreciation expenses from taxable earnings

1) In the method of comparables, the known values of a firmʹs cash flows are used to estimate the unknown cash flows of a similar firm.

TRUE

There is an overall relationships between _______ and ______ larger stocks have a lower volatility overall.

-Size, Risk

The standard deviation of returns of:

-Small capitalization stocks is higher than that of large capitalization stocks -Corporate bonds is higher than that of Treasury bills

Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine?

-The firms future cash flow -The firm's cost of capital

The beta of the market portfolio is:

5) Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money will have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why? A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs. B) No, because the cost of the movie was not recoverable and would have been lost whatever action he took. C) No, because going to see the movie means that the product of his initial investment was realized as originally planned. D) Yes, because he incurred no further costs by going to see the movie.

5) There is an overall relationship between ________ and ________. Larger stocks have a lower volatility overall. A) size, risk B) mean, standard deviation C) risk aversion, size D) volatility, mean

5) You own shares in Supernova Inc. that were purchased at a price of $23 per share. Quicksilver Inc. has offered to purchase Supernova Inc. and buy your shares at a price of $34 per share. What will be your return if you tender your shares to Quicksilver Inc. and the deal is completed? A) 47.83% B) 33.48% C) 50.22% D) 45.43%

50. The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags? A. $146,000 B. $275,000 C. $413,000 D. $623,000 E. $680,000

6) A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment? A) $10,048 B) $11,053 C) $16,077 D) $14,250

6) Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6,000,000 to buy the machine and $20,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of five years and will be depreciated over those five years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 0? A) -$6,020,000 B) -$6,000,000 C) -$5,418,000 D) $1,204,000

6) Investors demand a higher return for investments that have larger fluctuations in values because ________. A) they do not like risk B) they are risk seeking C) they invest for the long term D) they prefer fluctuations

6) Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product? A) the fluctuations in the cost of capital over the period in question B) the sales of a new product will typically accelerate, plateau, and ultimately decline over time C) the prices of technology products generally fall over time D) competition tends to reduce profit margins over time in most industries

62. The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000. The initial investment will require $96,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield? A. $5,120 B. $13,160 C. $25,840 D. $32,560 E. $41,840

7) A car dealership offers a car for $14,000 , with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year? A) $667 B) $1333 C) $13,333 D) $14,000

7) Because investors can eliminate unsystematic risk ʺfor freeʺ by diversifying their portfolios, they ________. A) do not require a risk premium for bearing it B) require a risk premium for bearing it C) are indifferent about credit spread and risk premium D) do not require a credit spread

7) Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential ʺblockbusterʺ drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $50 million in net income. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cureʹs ten drugs? A) $250 million B) $50 million C) $1 billion D) $0

7) CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFoodʹs marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project? A) $1.800 million B) $1.400 million C) $2.000 million D) $0.700 million

7) Which of the following is an example of cannibalization? A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. B) A grocery store begins selling T-shirts featuring the local universityʹs mascot. C) A basketball manufacturer adds basketball hoops to its product line. D) A convenience store begins selling pre-paid cell phones.

73. What is the expected return on a portfolio that is equally weighted between stocks K and L given the following information? A. 11.13 percent B. 11.86 percent C. 12.25 percent D. 13.32 percent E. 14.40 percent Q

77. Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a year to operate. The machines have a 6-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 16 percent? A. -$450,657 B. -$427,109 C. -$301,586 D. -$295,667 E. -$256,947

8) Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Joʹs estimate of the value of a share of Advanced Chemicals would be how much more than the market price? A) $2.02 B) $20.81 C) $21.01 D) $21.62

8) CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $4 million, which will be depreciated by straight-line depreciation over six years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $6 million per year for five years with production and support costs of $1.5 million per year. If CathFoodʹs marginal tax rate is 35%, what are the incremental earnings in the second year of this project? A) $2.492 million B) $2.100 million C) $3.833 million D) $1.342 million

8) Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $95. What was your dividend yield and capital gains yield on the investment? A) 2%, -5% B) 2%, 5% C) -2%, 5% D) 5%, 2%

80. The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted. What is the project's initial cash flow for net working capital? A. -$82,250 B. -$12,250 C. $12,250 D. $36,250 E. $44,250

81. Your portfolio is comprised of 40 percent of stock X, 15 percent of stock Y, and 45 percent of stock Z. Stock X has a beta of 1.16, stock Y has a beta of 1.47, and stock Z has a beta of 0.42. What is the beta of your portfolio? A. 0.87 B. 1.09 C. 1.13 D. 1.18 E. 1.21

87. Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the value of the depreciation tax shield in year 4 of the project? A. $49,000 B. $52,200 C. $68,600 D. $71,400 E. $76,500

9) A manufacturer of video games develops a new game over two years. This costs $830,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%? A) $950,349 B) $1,045,384 C) $1,520,559 D) $1,805,663

9) The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the cost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the projectʹs net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A) scenario analysis B) sensitivity analysis C) break-even analysis D) EBIT-break even analysis

9) Use the table for the question(s) below. FCF Forecast ($ million) Year 0 1 2 3 4 Sales 240 270 290 310 325.5 Growth versus Prior Year 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales) 27.00 29.00 31.00 32.55 Less: Income Tax (37%) (9.99) (10.73) (11.47) (12.44) Less Increase in NWC (12% of Change in Sales 3.6 2.4 2.4 1.86 Free Cash Flow 13.41 15.87 17.13 18.65 Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase? A) $3.27 B) $3.92 C) $5.72 D) $9.80

9) Which of the following investments had the largest fluctuations overall return over the past eighty years? A) small stocks B) S&P 500 C) corporate bonds D) Treasury bills

Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million) ($ million) P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% 8) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates? A) $6.27 to $8.86 B) $4.59 to $12.23 C) $1.15 to $1.53 D) $6.19 to $9.32

Project A Project B Time 0 -10,000 -10,000 Time 1 5,000 4,000 Time 2 4,000 3,000 Time 3 3,000 10,000 7) If WiseGuy Inc. uses payback period rule to choose projects, which of the projects (Project A or Project B) will rank highest? A) Project A B) Project B C) Project A and Project B have the same ranking. D) Cannot calculate a payback period without a discount rate

Which will cause the EBIT Break-Even for sales to increase?

A decrease in the sales price

58. The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working capital of $218,000. The firm has a tax rate of 35 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? A. $98,520 B. $125,520 C. $147,480 D. $268,480 E. $343,520

Which of the following statements is FALSE? A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. B) We can rule out inefficient portfolios because they represent inferior investment choices. C) The volatility of the portfolio will differ, depending on the correlation between the securities in the portfolio. D) Correlation has no effect on the expected return on a portfolio.

A) We say a portfolio is an efficient portfolio whenever it is possible to find another portfolio that is better in terms of both expected return and volatility. -not possible

Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product? A) the fluctuations in the cost of capital over the period in question B) the sales of a new product will typically accelerate, plateau, and ultimately decline over time C) the prices of technology products generally fall over time D) competition tends to reduce profit margins over time in most industries

A) the fluctuations in the cost of capital over the period in question

Which of the following is NOT a diversifiable risk? A) the risk that oil prices rise, increasing production costs B) the risk that the CEO is killed in a plane crash C) the risk of a key employee being hired away by a competitor D) the risk of a product liability lawsuit

A) the risk that oil prices rise, increasing production costs

13) What is the Net Present Value rule?

Answer: The Net Present Value rule states to accept a project if its net present value (NPV) is greater than zero.

24) What is the decision criterion using the Net Present Value rule?

Answer: The decision criteria using the Net Present Value rule is to reject projects if their net present value (NPV) is less than zero.

23) What is the decision criterion while using the payback rule?

Answer: The payback rule does not have any decision criteria. Consequently, decision making using payback rule is rather subjective.

22) How are the taxes paid under MACRS different from that paid under straight -line depreciation?

Answer: We are not paying less in taxes when using MACRS, but it is the timing of the tax payment that is different.

10) Which of the following is NOT a factor that a manager should bear in mind when estimating a projectʹs revenues and costs? A) Sales of a product will typically accelerate, stabilize, and then decline as the product becomes outdated or faces increased competition. B) A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product. C) The prices of technology products tend to fall over time as newer, superior technologies emerge and production costs decline. D) Prices and costs tend to rise with the general level of inflation in the economy

100. Phone Home, Inc. is considering a new 5-year expansion project that requires an initial fixed asset investment of $2.484 million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless. The project is estimated to generate $2,208,000 in annual sales, with costs of $883,200. The tax rate is 32 percent and the required return on the project is 11 percent. What is the net present value for this project? A. $1,432,155 B. $1,433,059 C. $1,434,098 D. $1,434,217 E. $1,435,008

101. Phone Home, Inc. is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will have a market value of $231,000. The project requires an initial investment in net working capital of $330,000, all of which will be recovered at the end of the project. The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate is 31 percent and the required return for the project is 15 percent. What is the net present value for this project? A. $714,056 B. $733,970 C. $741,335 D. $742,208 E. $744,595

104. A stock has an expected return of 11 percent, the risk-free rate is 6.1 percent, and the market risk premium is 4 percent. What is the stock's beta? A. 1.18 B. 1.23 C. 1.29 D. 1.32 E. 1.35

107. Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $112,000 in pretax annual operating costs. System B costs $517,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why? A. A; The net present value is $211,516. B. A; The net present value is -$582,720. C. A; The net present value is -$314,216. D. B; The net present value is $308,222. E. B: The net present value is -$625,123.

11) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 MACRS Depreciation Rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% Massive Amusements, an owner of theme parks, invests $65 million to build a roller coaster. This can be depreciated using the MACRS schedule shown above. How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7 -year, straight-line depreciation, if the tax rate is 35%? A) $974,680 B) $1,218,350 C) $2,193,030 D) $6,091,750

59. A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent? A. -$311.02 B. $2,168.02 C. $4,650.11 D. $9,188.98 E. $21,168.02

11) A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment? A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1% D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%

11) On a particular day, a mining company reveals that, due to new extraction technology, the extractable yield from several of its nickel/lead mines has risen by 15%. Which of the following is the LEAST likely consequence of such an announcement? A) The price of the stock would rise. B) Investors would determine that the estimates of the firmʹs value on the date prior to the announcement were too high. C) Investors would increase their forecast of future cash flows in that firm. D) Investors would revise their estimates of the net present value (NPV) of the firm.

12) Amazon.com stock prices gave a realized return of 15%, 15%, 15%, and 10% over four successive quarters. What is the annual realized return for Amazon.com for the year? A) 60.57% B) 67.30% C) 53.84% D) 74.03%

12) Peter has a business opportunity that requires him to invest $10,000 today, and receive $12,000 in one year. He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if he delays them for a year. What is the best alternative for Peter out of the following choices? A) No, since the net present value (NPV) of the investment, should he take it, is less than the net present value (NPV) of the home repairs if he delays them for one year. B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. C) Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs. D) Yes, since the net present value (NPV) of the investment, should he take it, is greater than the net present value (NPV) of the home repairs if he delays them for one year.

13) Which of the following statements is FALSE? A) The more cash a firm uses to repurchase shares, the less it has available to pay dividends. B) Free cash flow measures the cash generated by a firm after payments to debt or equity holders are considered. C) We estimate a firmʹs current enterprise value by computing the present value (PV) of the firmʹs free cash flow. D) We can interpret the enterprise value of a firm as the net cost of acquiring the firmʹs equity, taking its cash, and paying off all debts

13) Which of the following statements is FALSE? A) The most common valuation multiple is the price-earnings ratio. B) You should be willing to pay proportionally more for a stock with lower current earnings. C) A firmʹs price-earnings ratio is equal to the share price divided by its earnings per share. D) The intuition behind the use of the price-earnings ratio is that when you buy a stock, you are in a sense buying the rights to the firmʹs future earnings, and differences in the scale of firmsʹ earnings are likely to persist.

13. Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles

14) Which of the following statements is FALSE? A) Many projects use a resource that the company already owns. B) When evaluating a capital budgeting decision, we generally include interest expense. C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D) As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings

14) Which of the following statements is FALSE? A) We can estimate the value of a firmʹs shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms. B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings. C) Forward earnings are the expected earnings over the coming 12 months. D) Trailing earnings are the earnings over the previous 12 months

14) Which of the following statements is TRUE? A) On average, smaller stocks have lower volatility than Treasury bills. B) Portfolios of smaller stocks are typically less volatile than individual small stocks. C) On average, smaller stocks have lower returns than larger stocks. D) On average, Treasury bills have higher returns than stocks.

14. If a project has a net present value equal to zero, then: A. the total of the cash inflows must equal the initial cost of the project. B. the project earns a return exactly equal to the discount rate. C. a decrease in the project's initial cost will cause the project to have a negative NPV. D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E. the project's PI must be also be equal to zero.

15) An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000 . If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile? A) $2.62 million B) $2.91 million C) $3.21 million D) $3.50 million

15) Which of the following costs would you consider when making a capital budgeting decision? A) sunk cost B) opportunity cost C) interest expense D) fixed overhead cost

59. Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $859,000. If the project is implemented, taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach? A. $25,000 B. $103,000 C. $157,000 D. $181,000 E. $209,000

19) The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%. The depreciation tax shield for the Sisyphean Corporationʹs project in the first year is closest to ________. A) $10,500 B) $3500 C) $3150 D) $2800

2) Year 1 2 3 4 Free Cash Flow $12 million $18 million $22 million $26 million Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrumʹs expected terminal enterprise value? A) $413.4 million B) $459.3 million C) $505.3 million D) $528.2 million

2. The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. underlying value principle B. stand-alone principle C. equivalent cost principle D. salvage principle E. fundamental principle

2. Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows? A. constant dividend growth model B. discounted cash flow valuation C. average accounting return D. expected earnings model E. internal rate of return

20) Bubba Ho-Tep Company reported net income of $290 million for the most recent fiscal year. The firm had depreciation expenses of $100 million and capital expenditures of $150 million. Although it had no interest expense, the firm did have an increase in net working capital of $30 million. What is Bubba Ho-Tepʹs free cash flow? A) $10 million B) $210 million C) $270 million D) $570 million

20) If the Federal Reserve were to change from an expansionary to a contractionary monetary policy, this would be an example of ________. A) unsystematic risk B) systematic risk C) independent risk D) diversification risk

20) Which of the following would you NOT consider when making a capital budgeting decision? A) the additional taxes a firm would have to pay in the next year B) the cost of a marketing study completed last year C) the opportunity to lease out a warehouse instead of using it to house a new production line D) the change in direct labor expense due to the purchase of a new machine

20. All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project A. I and II only B. I and IV only C. II and IV only D. I, II, and IV only E. I, II, III, and IV

21) Suppose the quarterly arithmetic average return for a stock is 10% per quarter and the stock gives a return of 15% each over the next two quarters. The arithmetic average return over the six quarters is ________. A) 15.17% B) 11.67% C) 12.83% D) 16.33%

22) The geometric average annual return for a large capitalization stock portfolio is 10% for ten years and 6% per year for the next five years. The geometric average annual return for the entire 15 year period is ________. A) 9.08% B) 8.65% C) 8.22% D) 9.52%

23. A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule. II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project's internal rate of return must equal the required return. A. I only B. I and II only C. II and III only D. I, III, and IV only E. I, II, III, and IV

26. Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

27. A company that utilizes the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C. can depreciate the cost of land, if it so desires. D. will expense less than the entire cost of an asset. E. cannot expense any of the cost of a new asset during the first year of the asset's life.

28. Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2? A. $216,000/(1 + 0.20 + 0.32) B. $216,000 (1 - 0.20 - 0.32) C. $216,000 (0.20 + 0.32) D. [$216,000 (1 - 0.20)] (1 - 0.32) E. $216,000/[(1 + 0.20)(1 + 0.32)]

29) If asset Aʹs return is exactly two times asset Bʹs return, then following risk return tradeoff, the standard deviation of asset A should be ________ times the standard deviation of asset B. A) 3 B) 2 C) 1 D) 4

3) Suppose you invested $79 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.41 today and then you sold it for $66. What was your return on the investment? A) -20.72% B) -$15.94 % C) -18.33% D) -17.53%

39. Which one of the following statements is correct in relation to independent projects? A. The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. B. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. C. A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. D. The net present value profile is upsloping for projects with both investing and financing type cash flows. E. Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

4) A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colors. If this device is a success, the manufacturer plans to release gaming versions of its trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard? A) option to delay B) option to expand C) option to abandon D) option to switch

41. Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? A. conflicts with the results of the net present value decision rule B. assumes the firm has sufficient funds to undertake both projects C. agrees with the decision that would also apply if the projects were mutually exclusive D. bases the accept/reject decision on the same variables as the average accounting return E. fails to provide useful information as the firm must reject at least one of the projects

41. When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost A. I and II B. I and III C. I and IV D. II and IIII E. II and IV

43. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. accepted because the internal rate of return is positive. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is negative.

45) The average annual return over the period 1926-2009 for the S&P 500 is 12.8%, and the standard deviation of returns is 21.4%. Based on these numbers, what is a 67% confidence interval for 2010 returns? A) -1.3%, 20.5% B) -8.6%, 34.2% C) -25.8%, 54.7% D) -25.8%, 47.9%

47. Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $280,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.47 million. What amount should be used as the initial cash flow for this project? A. -$1,470,000 B. -$1,810,000 C. -$1,825,000 D. -$1,845,000 E. -$1,860,000

5) A companyʹs stock price jumped when it announced that its revenue had decreased because of the quality issues of its products. This is an example of ________. A) market risk B) unsystematic risk C) systematic risk D) undiversifiable risk

5) Project A Project B Time 0 -10,000 -10,000 Time 1 5,000 4,000 Time 2 4,000 3,000 Time 3 3,000 10,000 If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose? A) Project A B) Project B C) Neither project both have negative NPV. D) Both projects both have positive NPV.

5) The risk that is linked across outcomes is called ________. A) diversifiable risk B) common risk C) uncorrelated risk D) independent risk

5) Which of the following best defines incremental earnings? A) cash flows arising from a particular investment decision B) the amount by which a firmʹs earnings are expected to change as a result of an investment decision C) the earnings arising from all projects that a company plans to undertake in a fixed time span D) the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

5) Which of the following formulas will correctly calculate Net Working Capital? A) Cash + Inventory + Receivables + Payables B) Cash + Inventory + Receivables - Payables C) Cash + Inventory - Receivables + Payables D) Cash - Inventory + Receivables + Payables

5) Which of the following statements regarding real options is NOT correct? A) Real options should only be exercised when they increase the NPV of a project. B) Real options enhance the forecast of a projectʹs expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date. C) Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. D) Real options build greater flexibility into a project and thus increase its net present value (NPV).

53. The excess return earned by an asset that has a beta of 1.34 over that earned by a risk-free asset is referred to as the: A. market risk premium. B. risk premium. C. systematic return. D. total return. E. real rate of return.

56. According to CAPM, the amount of reward an investor receives for bearing the risk of an individual security depends upon the: A. amount of total risk assumed and the market risk premium. B. market risk premium and the amount of systematic risk inherent in the security. C. risk free rate, the market rate of return, and the standard deviation of the security. D. beta of the security and the market rate of return. E. standard deviation of the security and the risk-free rate of return.

57. Which one of the following should earn the most risk premium based on CAPM? A. diversified portfolio with returns similar to the overall market B. stock with a beta of 1.38 C. stock with a beta of 0.74 D. U.S. Treasury bill E. portfolio with a beta of 1.01

7) Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $15 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $53 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelsonʹs marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project? A) $25.5 million B) $14.3 million C) $23.8 million D) $9.5 million

7) Which of the following investments offered the lowest overall return over the past eighty years? A) small stocks B) Treasury bills C) S&P 500 D) corporate bonds

7) Which of the following is NOT a limitation of the payback period rule? A) It does not account for the time value of money. B) It is difficult to calculate. C) It ignores cash flows after payback. D) It does not account for changes in the discount rate

7. Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? A. IRR B. ACRS C. AAR D. straight-line to zero E. straight-line with salvage

71. A project will produce an operating cash flow of $14,600 a year for 8 years. The initial fixed asset investment in the project will be $48,900. The net aftertax salvage value is estimated at $11,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 12 percent? A. $23,627.54 B. $28,070.26 C. $34,627.54 D. $39,070.26 E. $41,040.83

72. Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000. The system will cost $39,900 to purchase and install. This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation. What is the amount of the earnings before interest and taxes for this project? A. $10,525 B. $13,025 C. $15,525 D. $16,900 E. $19,400

72. What is the expected return on this portfolio? A. 11.48 percent B. 11.92 percent C. 13.03 percent D. 13.42 percent E. 13.97 percent

74. It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period? A. 1.48 years B. 1.67 years C. 1.82 years D. 1.95 years E. 2.00 years

75. What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? A. .000017 B. .000023 C. .000118 D. .000136 E. .000161

75. You are considering a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? A. 3.21 years B. 3.28 years C. 3.36 years D. 4.21 years E. 4.29 years

77. Alicia is considering adding toys to her gift shop. She estimates that the cost of inventory will be $7,500. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,800, $2,700, $3,200, and $3,400 over the next four years, respectively. Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not? A. No; The payback period is 2.93 years. B. No; The payback period is 3.38 years. C. Yes; The payback period is 2.93 years. D. Yes; The payback period is 3.01 years. E. Yes; The payback period is 3.38 years.

78. What is the standard deviation of the returns on a $30,000 portfolio which consists of stocks S and T? Stock S is valued at $12,000. A. 1.07 percent B. 1.22 percent C. 1.36 percent D. 1.49 percent E. 1.63 percent

8) A lawn maintenance company compares two ride-on mowersthe Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision? A) Fuel prices are expected to rise and raise the annual running costs of all mowers. B) The mower is only expected to be needed for three years. C) The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. D) The number of customers requiring lawn-mowing services is expected to sharply increase in the near future

8) The risk premium of a security is determined by its ________ risk and does not depend on its ________ risk. A) systematic, undiversifiable B) systematic, unsystematic C) undiversifiable, diversifiable D) diversifiable, undiversifiable

83. Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 with costs of $640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the project's cash flow at time zero? A. -$536,000 B. -$614,000 C. -$720,000 D. -$779,000 E. -$944,000

84. The market has an expected rate of return of 10.7 percent. The long-term government bond is expected to yield 5.8 percent and the U.S. Treasury bill is expected to yield 3.9 percent. The inflation rate is 3.6 percent. What is the market risk premium? A. 6.0 percent B. 6.8 percent C. 7.5 percent D. 8.5 percent E. 9.3 percent

55. Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? A. $11,220 B. $29,920 C. $38,720 D. $46,480 E. $46,620

85. Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the amount of the aftertax cash flow from the sale of the fixed assets at the end of this project? A. $35,496 B. $68,904 C. $104,400 D. $287,615 E. $344,520

85. The risk-free rate of return is 3.9 percent and the market risk premium is 6.2 percent. What is the expected rate of return on a stock with a beta of 1.21? A. 10.92 percent B. 11.40 percent C. 12.22 percent D. 12.47 percent E. 12.79 percent

87. The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium? A. 7.02 percent B. 7.90 percent C. 10.63 percent D. 11.22 percent E. 11.60 percent

88. Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value of the equipment? A. $17,150 B. $31,850 C. $118,800 D. $237,600 E. $343,000

9) A firm reports that in a certain year it had a net income of $5.0 million, depreciation expenses of $3.0 million, capital expenditures of $2.0 million, and Net Working Capital decreased by $1.1 million. What is the firmʹs free cash flow for that year? A) $11.1 million B) $7.1 million C) $5.1 million D) $4.9 million

9) Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelonʹs shares be expected to fall in price as a result of this accident? A) $0.93 B) $1.03 C) $1.14 D) $1.34

9) The cash flows for four investments have been identified as follows: Investment A B C D Cash Flow Today in thousands of dollars -8.0 -12.2 -6.0 -2.2 Cash Flow in One Year in thousands of dollars 9.4 14.3 7.05 2.59 Based on the above information, and with an interest rate of 7%, which is the best investment? A) Investment A B) Investment B C) Investment C D) Investment D

9) When investing for a long term, investors care about the volatility of ________ returns and not the volatility of ________ returns. A) average, cumulative B) cumulative, average C) mean, cumulative D) mean, average

Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million) ($ million) P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% 9) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41 , what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used? A) -$0.08 B) -$0.13 C) -$1.27 D) -$1.39

Which of the following statements is FALSE? A) We can estimate the value of a firm's shares by multiplying its current earnings per share by the average price-earnings ratio of comparable firms. B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings. C) Forward earnings are the expected earnings over the coming 12 months. D) Trailing earnings are the earnings over the previous 12 months.

B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is based on actual not expected earnings. -leading price-earnings ratio since it is based on expected earnings

Which of the following statements is FALSE? A) The more cash the firm uses to repurchase shares, the less it has available to pay dividends. B) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. C) We estimate a firm's current enterprise value by computing the present value (PV) of the firm's free cash flow. D) We can interpret the enterprise value as the net cost of acquiring the firm's equity, taking its cash, and paying off all debts.

B) Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered. -before

Which of the following statements is FALSE? A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV) B) The payback rule is reliable because it considers the time value of money an depends on the cost of capital C) For most investment opportunities expenses occur initially and cash is received later D) Fifty percent of firms surveyed reported using the payback rule for making decisions

B) The payback rule is reliable because it considers the time value of money an depends on the cost of capital

Which of the following statements is FALSE? A) Many projects use a resource that the company already owns. B) When evaluating a capital budgeting decision, we generally include interest expense. C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D) As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

B) When evaluating a capital budgeting decision, we generally include interest expense.

Which of the following statements is FALSE? A) The most common valuation multiple is the price-earnings ratio. B) You should be willing to pay proportionally more for a stock with lower current earnings. C) A firmʹs price-earnings ratio is equal to the share price divided by its earnings per share. D) The intuition behind the use of the price-earnings ratio is that when you buy a stock, you are in a sense buying the rights to the firmʹs future earnings, and differences in the scale of firmsʹ earnings are likely to persist.

B) You should be willing to pay proportionally more for a stock with lower current earnings.

A linear regression to estimate the relation between General Motors' stock returns and the market's return gives the best fitting line that represents the relation between the stock and the market. The slope of this line is our estimate of

Beta

54. Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? A. The net present value indicates accept while the internal rate of return indicates reject. B. Payback indicates acceptance. C. The payback decision rule could override the accept decision indicated by the net present value. D. The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. E. The net present value decision rule is the only rule that matters when making the final decision.

1) Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? A) 6.57% B) 7.51% C) 9.38% D) 10.32%

10) A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one yearʹs time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000 , and the interest rate is 7%, what is the net present value (NPV) of this investment? A) $240,000 B) $87,103 C) $0 D) $567,103

10) Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $2.0 million per year in perpetuity, while investment B pays $1.4 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? A) 3% B) 7% C) 13% D) 15%

10. Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. storing supplies in the same space currently used for materials storage B. utilizing the basket manager to oversee wreath production C. hiring additional employees to handle the increased workload should the firm accept the wreath project D. researching the market to determine if wreath sales might be profitable before deciding to proceed E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

100. What is the expected return and standard deviation for the following stock? A. 15.49 percent; 14.28 percent B. 15.49 percent; 14.67 percent C. 17.00 percent; 15.24 percent D. 17.00 percent; 15.74 percent E. 17.00 percent'; 16.01 percent

107. Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the return on the market? A. 13.99 percent B. 14.42 percent C. 14.67 percent D. 14.78 percent E. 15.01 percent

11) Revenues Cost of Goods Sold Year 0 Year 1 700,000 -320,000 Year 2 700,000 -320,000 Year 3 700,000 -320,000 Gross Profit Selling, General and Admin Depreciation 380,000 -105,000 -190,000 380,000 -105,000 -190,000 380,000 -105,000 -190,000 EBIT Income tax (35%) 85,000 -29,750 85,000 -29,750 85,000 -29,750 Incremental Earnings Capital Purchases Changes to NWC -600,000 55,250 -12,000 55,250 -12,000 55,250 -12,000 Cromwell Industries is considering a new project which will have costs, revenues, etc. as shown by the data above. If the cost of capital is 8.0%, what is the net present value (NPV) of this project? A) -$56,662 B) -$59,810 C) $62,958 D) $69,254

11) A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.1%? A) -$860 B) -$229 C) -$574 D) $860

11) Consider a project with the following cash flows: Year Cash Flow 0 -12,000 1 3000 2 3000 3 3000 4 3000 If the appropriate discount rate for this project is 13%, then the net present value (NPV) is closest to ________. A) $24,000 B) -$1846 C) -$3077 D) -$2154

11) If you want to value a firm that consistently pays out its earnings as dividends, the simplest model for you to use is the ________. A) enterprise value model B) method of comparables C) dividend-discount model D) discounted free cash flow model

25) Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year 0 1 2 3 Sales (Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT 20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 +/(-) increase/(decrease) in working capital 5,000 5,000 5,000 - capital expenditures -90,000 The free cash flow for the first year of Epiphanyʹs project is closest to ________. A) $45,600 B) $28,500 C) $38,000 D) $53,200

26) Ford Motor Company had realized returns of 15%, 30%, -15%, and -30% over four quarters. What is the quarterly standard deviation of returns for Ford? A) 24.65% B) 32.86% C) 27.39% D) 30.12%

27) Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year 0 1 2 3 Sales (Revenues) 150,000 150,000 150,000 - Cost of Goods Sold (50% of Sales) 75,000 75,000 75,000 - Depreciation 25,000 25,000 25,000 = EBIT 50,000 50,000 50,000 - Taxes (35%) 17,500 17,500 17,500 = unlevered net income 32,500 32,500 32,500 + Depreciation 25,000 25,000 25,000 +(-) increase/(decrease) in working capital 5,000 5,000 -10,000 - capital expenditures -90,000 The net present value (NPV) for Epiphanyʹs Project is closest to ________. A) $23,387 B) $140,319 C) $46,773 D) $93,546

29. Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B. A project with an IRR equal to the required return would reduce the value of a firm if accepted. C. The IRR is equal to the required return when the net present value is equal to zero. D. Financing type projects should be accepted if the IRR exceeds the required return. E. The average accounting return is a better method of analysis than the IRR from a financial point of view.

3) After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site? A) option to delay B) option to expand C) option to abandon D) option to switch

3) Individual investorsʹ tendency to trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals is known as ________. A) the disposition effect B) the investor attention hypothesis C) the investor overconfidence hypothesis D) the excessive trading costs hypothesis

3) The capital budgeting process begins by ________. A) analyzing alternate projects B) evaluating the net present value (NPV) of each projectʹs cash flows C) compiling a list of potential projects D) forecasting the future consequences for the firm of each potential project

3) Valuation models use the relationship between share value, future cash flows, and the cost of capital to estimate these quantities for a given firm. Realistically, for a publicly traded firm, what can we reliably use such models to determine? I. the firmʹs future cash flows II. the firmʹs cost of capital III. the firmʹs market price A) I only B) II only C) III only D) I and II

31) A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firmʹs marginal tax rate is 35%? A) $374,625 B) $341,250 C) $416,250 D) $499,500

31. Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project's internal rate of return? A. decreasing the required discount rate B. increasing the initial investment in fixed assets C. condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows D. eliminating the salvage value E. decreasing the amount of the final cash inflow

32) The Ishares Bond Index fund (TLT) has a mean and annual standard deviation of returns of 5% and 10%, respectively. What is the 66% confidence interval for the returns on TLT? A) -7%, 10% B) 5%, 10% C) -5%, 15% D) -10%, 10%

32. The internal rate of return is: A. the discount rate that makes the net present value of a project equal to the initial cash outlay. B. equivalent to the discount rate that makes the net present value equal to one. C. tedious to compute without the use of either a financial calculator or a computer. D. highly dependent upon the current interest rates offered in the marketplace. E. a better methodology than net present value when dealing with unconventional cash flows.

32. Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) A. Sale price + (Sales price - Book value) T B. Sale price + (Sales price - Book value) (1 - T) C. Sale price + (Book value - Sale price) T D. Sale price + (Book value - Sale price) (1 - T) E. Sale price (1 - T)

33) The average annual return for the S&P 500 from 1886 to 2006 is 5%, with a standard deviation of 15%. Based on these numbers, what is a 95% confidence interval for 2007ʹs returns? A) -12.5%, 17.5% B) -15%, 25% C) -25%, 35% D) -25%, 25%

33. Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A. EBIT + D B. EBIT - T C. NI + D D. (Sales - Costs) (1 - D) (1- T) E. (Sales - Costs) (1 - T)

46. Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows, at least in the first few years of its life. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.

46. Mutually exclusive projects are best defined as competing projects which: A. would commence on the same day. B. have the same initial start-up costs. C. both require the total use of the same limited resource. D. both have negative cash outflows at time zero. E. have the same life span.

48. Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis. Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information. His recommendation should be to accept: A. both projects. B. project B because it has the shortest payback period. C. project B and reject project A based on their net present values. D. project A and reject project B based on their average accounting returns. E. neither project.

48. Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company currently has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $490,000 will also be required. What is the amount of the initial cash flow for this expansion project? A. -$785,000 B. -$823,000 C. -$835,000 D. -$859,000 E. -$883,000

49. Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $89,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project? A. $0 B. $21,000 C. $89,000 D. $110,000 E. $160,000

49. Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows? A. The internal rate of return decision may contradict the net present value decision. B. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. C. The payback decision rule could override the net present value decision rule should cash availability be limited. D. The profitability index rule cannot be applied in this situation. E. The projects cannot be accepted unless the average accounting return decision ruling is positive.

5) Which of the following is NOT a limitation of the payback rule? A) It does not consider the time value of money. B) Lacks a decision criterion that is economically based. C) It is difficult to calculate. D) It does not consider cash flows occurring after the payback period.

5. A project's average net income divided by its average book value is referred to as the project's average: A. net present value. B. internal rate of return. C. accounting return. D. profitability index. E. payback period.

5. Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. the differences in a firm's cash flows with and without a particular project

50. In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis. A. I and III only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

51. Mason Farms purchased a building for $729,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. The annual taxes on the property are $11,000. The building has a current market value of $825,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? A. $494,000 B. $582,000 C. $825,000 D. $865,000 E. $953,000

52. You own a house that you rent for $1,100 a month. The maintenance expenses on the house average $200 a month. The house cost $219,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will incur $14,000 in real estate fees. The annual property taxes are $4,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A. $211,800 B. $221,000 C. $225,000 D. $235,000 E. $239,000

53. Which two methods of project analysis are the most biased towards short-term projects? A. net present value and internal rate of return B. internal rate of return and profitability index C. payback and discounted payback D. net present value and discounted payback E. discounted payback and profitability index

8) Use the table for the question(s) below. FCF Forecast ($ million) Year 0 1 2 3 4 Sales 240 270 290 310 325.5 Growth versus Prior Year 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales) 27.00 29.00 31.00 32.55 Less: Income Tax (37%) (9.99) 10.73 11.47 12.44 Less Increase in NWC (12% of Change in Sales 3.6 2.4 2.4 1.86 Free Cash Flow 13.41 15.87 17.13 18.65 Banco Industries expect sales to grow at a rapid rate over the next three years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. If Banco industries has a weighted average cost of capital of 11%, $50 million in cash, $80 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Bancoʹs stock price at the start of year 1? A) $6.52 B) $11.74 C) $13.04 D) $23.48

8) Which of the following investments offered the highest overall return over the past eighty years? A) Treasury bills B) S&P 500 C) small stocks D) corporate bonds

8) Which of the following is true regarding the profitability index? A) It does not use the net present value (NPV) to assess benefits. B) It is very simple to compute. C) Attention must be taken when using it to make sure that all of the constrained resource is utilized. D) It is unreliable when used for choosing between different projects.

8) Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns. B) Investments with higher volatility should have a higher risk premium and, therefore, higher returns. C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities. D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.

84. Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the amount of the earnings before interest and taxes for the first year of this project? A. $97,680 B. $130,000 C. $148,000 D. $217,320 E. $235,000

86. Hollister & Hollister is considering a new project. The project will require $522,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 34 percent and the required rate of return is 14 percent. What is the cash flow recovery from net working capital at the end of this project? A. $14,000 B. $75,000 C. $92,000 D. $344,000 E. $422,000

89. Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the recovery amount attributable to net working capital at the end of the project? A. $21,000 B. $54,600 C. $84,000 D. $178,000 E. $196,000

9) A small manufacturer that makes clothespins and other household products buys new injection molding equipment for a cost of $500,000. This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 25%. If the manufacturer currently makes 75 tons of clothespins per year, which sell at $18,000 per ton, what will be the increase in revenue next year from the new equipment? A) $125,000 B) $303,750 C) $337,500 D) $837,500

9) Consider the following average annual returns: Investment Average Return Small Stocks 23.5% S&P 500 13.1% Corporate Bonds 7.3% Treasure Bonds 6.1% Treasury Bills 4.0% What is the excess return for the portfolio of small stocks? A) 11.7% B) 16.6% C) 19.5% D) 17.6%

9) Your investment over one year yielded a capital gains yield of 5% and no dividend yield. If the sale price was $114 per share, what was the cost of the investment? A) $119.43 B) $103.14 C) $108.57 D) $114.00

9. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct.

91. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.8 percent? A. A B. B C. C D. D E. E

98. You own a portfolio that has $2,000 invested in Stock A and $1,400 invested in Stock B. The expected returns on these stocks are 14 percent and 9 percent, respectively. What is the expected return on the portfolio? A. 11.06 percent B. 11.50 percent C. 11.94 percent D. 12.13 percent E. 12.41 percent

99. Phone Home, Inc. is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.994 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. The project is estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The tax rate is 31 percent. What is the operating cash flow for this project? A. $1,894,318 B. $2,211,407 C. $2,515,482 D. $2,663,021 E. $2,848,315

10) Which of the following is the appropriate way to calculate the price of a share of a given company using the free cash flow valuation model? A) P0 = Div1/(rE - g) B) P0 = PV(Future Free Cash Flow of Firm) / (Shares Outstanding0) C) P0 = [Div1 / (rE - g)] / (Shares Outstanding0) D) P0 = (V0 + Cash0 - Debt0) / (Shares Outstanding0)

Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million) ($ million) P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% 10) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm? A) P/E B) Price/Book C) Enterprise Value/Sales D) Enterprise Value/EBITDA

Name Market Enterprise Enterprise Enterprise Capitalization Value Price/ Value/ Value/ ($ million) ($ million) P/E Book Sales EBITDA Gannet 6350 10,163 7.36 0.73 1.4 5.04 New York Times 2423 3472 18.09 2.64 1.10 7.21 McClatchy 675 3061 9.76 1.68 1.40 5.64 Media General 326 1192 14.89 0.39 1.31 7.65 Lee Enterprises 267 1724 6.55 0.82 1.57 6.65 Average 11.33 1.25 1.35 6.44 Maximum +60% 112% +16% +22% Minimum -40% -69% -18% -19% 7) The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firmʹs share price? A) $6.45 B) $7.20 C) $7.17 D) $7.53

Which of the following statements is FALSE? A) Stock returns will tend to move together if they are affected similarly by economic events. B) Stocks in the same industry tend to have more highly correlated returns than stocks in different industries. C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. D) With a positive amount invested in each stock, the more the stocks move together and the higher their covariance or correlation, the more variable the portfolio will be.

C) Almost all of the correlations between stocks are negative, illustrating the general tendency of stocks to move together. -postivie

Which of the following statements is FALSE? A) The long-run growth rate gFCF is typically based on the expected long-run growth rate of the firm's revenues. B) Because the firm's free cash flow is equal to the sum of the free cash flows from the firm's current and future investments, we can interpret the firm's enterprise value as the total net present value (NPV) that the firm will earn from continuing its existing projects and initiating new ones. C) If the firm has no debt, then rwacc equals the risk-free rate of return. D) When using the discounted free cash flow model, we forecast the firm's free cash flow up to some horizon, together with some terminal (continuation) value of the enterprise.

C) If the firm has no debt, then rwacc equals the risk-free rate of return. = -=cost of equity

Which of the following statements is FALSE? A) We begin the capital budgeting process by determining the incremental earnings of a project. B) The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pretax income. C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings. D) The opportunity cost of using a resource is the value it could have provided in its best alternative use.

C) Investments in plant, property, and equipment are directly listed as expense when calculating earnings

Which of the following statements is FALSE? A) Expected return should rise proportionately with volatility. B) Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return. C) Smaller stocks have lower volatility than larger stocks. D) The largest stocks are typically more volatile than a portfolio of large stocks.

C) Smaller stocks have lower volatility than larger stocks -Higher

Which of the following statements is FALSE? A) Investments with higher volatility have rewarded investors with higher average returns B) Investments with higher volatility should have a higher risk premium, and there, higher returns C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on

C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities

Which of the following is NOT a systematic risk? A) the risk that oil prices rise, increasing production costs B) the risk that the economy slows, reducing demand for your firm's products C) the risk that your new product will not receive regulatory approval D) the risk that the Federal Reserve raises interest rates

C) the risk that your new product will not receive regulatory approval

Which formula will correctly calculate Net Working Capital?

Cash + Inventory + Receivables - Payable or Current Assets - Current Liabilities

10) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 MACRS Depreciation Rate 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000 , what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A) $11,520 B) $9480 C) $3792 D) $17,208

10) Which of the following statements is FALSE? A) In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B) The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

10. The present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period.

103. Your firm is contemplating the purchase of a new $1,628,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $158,400 at the end of that time. You will save $633,600 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction). The net working capital will return to its original level when the project ends. The tax rate is 35 percent. What is the internal rate of return for this project? A. 11.78 percent B. 13.49 percent C. 18.21 percent D. 21.65 percent E. 23.58 percent

108. Consider a project to supply 60,800,000 postage stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would net you $912,000, aftertax. The land can be sold for $1,500,000 after taxes in 5 years. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.38 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit? A. $0.018 B. $0.020 C. $0.023 D. $0.026 E. $0.029

11) Which of the following is NOT an advantage of the valuation multiple method as compared to the discounted cash flow method? A) calculations based upon widely available information B) based upon actual stock prices of real firms C) does not rely on estimates of future cash flows D) takes into account important differences between different firms

12) Revenues Cost of Goods Sold Year 0 Year 1 140,000 -70,000 Year 2 440,000 220,000 Year 3 440,000 220,000 Year 4 350,000 175,000 Gross Profit Selling, General and Admin Depreciation 70,000 -6400 -75,000 220,000 6400 75,000 220,000 6400 75,000 175,000 6400 75,000 EBIT Income tax (35%) -11,400 3990 138,600 -48,510 138,600 -48,510 93,600 -32,760 Incremental Earnings Capital Purchases Changes to NWC -280,000 -7410 -5,000 90,090 -5,000 90,090 -5,000 60,840 -5,000 A garage is installing a new ʺbubble-washʺ car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10%, what is the net present value (NPV) of this project? A) -$135,493 B) -$143,021 C) $165,603 D) $150,548

12) A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes? A) It will increase taxes by $8 million. B) It will increase taxes by $2.8 million. C) It will have no effect on taxes. D) It will reduce taxes by $2.8 million.

12) Which of the following statements is FALSE? A) Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale. B) In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. C) Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. D) A valuation multiple is a ratio of some measure of a firmʹs scale to the value of the firm

12. The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental E. fixed

12. Which one of the following will decrease the net present value of a project? A. increasing the value of each of the project's discounted cash inflows B. moving each of the cash inflows back to a later time period C. decreasing the required discount rate D. increasing the project's initial cost at time zero E. increasing the amount of the final cash inflow

13) Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation? A) The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline. B) The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses. C) The firm will have substantially fewer depreciation expenses later in the depreciation timeline. D) The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

14) Which of the following statements is FALSE? A) A firmʹs weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firmʹs equity and debt. B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model, a firmʹs cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. C) We interpret rwacc as the expected return a firm must pay to investors to compensate them for the risk of holding the firmʹs debt and equity together. D) When using the discounted free cash flow model, we should use a firmʹs equity cost of capital.

4) A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners? A) Option A, since it has a lower equivalent annual annuity. B) Option B, since it has a lower equivalent annual annuity. C) Option A, since it has a greater equivalent annual annuity. D) Option B, since it has a greater equivalent annual annuity

4) Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorianʹs stock is currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorianʹs stock? A) Sell any Praetorian stock that she owns. B) Short Praetorianʹs stock. C) Revise Praetorianʹs equity cost of capital. D) Revise her estimate of Praetorianʹs dividend growth.

4) The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken? A) Year: 0 1 2345 Cash flow: -$20,000 $6000 $6000 $6000 $6000 $6000 Cost of Capital: 8.2% B) Year: 0 1 2 3 4 5 Cash flow: -$15,000 $4000 $4000 $4000 $4000 $4000 Cost of Capital: 7.0% C) Year: 0 1 2 3 4 5 Cash flow: -$18,000 $5000 $5000 $5000 $5000 $5000 Cost of Capital: 7.6% D) Year: 0 1 2 3 4 5 Cash flow: -$12,000 $4000 $4000 $4000 $4000 $4000 Cost of Capital: 5.0%

4) The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers? A) No, as it has a net present value (NPV) of -$4.45 million. B) No, as it has a net present value (NPV) of -$2.22 million. C) Yes, as it has a net present value (NPV) of $13.34 million. D) Yes, as it has a net present value (NPV) of $22.23 million.

4) The ultimate goal of the capital budgeting process is to ________. A) determine how the consequences of making a particular decision affects the firmʹs revenues and costs B) list the projects and investments that a company plans to undertake in the future C) forecast the consequences of a list of future projects for the firm D) determine the effect of the decision to accept or reject a project on the firmʹs cash flows

4) Which of the following is a disadvantage of the Net Present Value rule? A) can be misleading if inflows come before outflows B) not necessarily consistent with maximizing shareholder wealth C) ignores cash flows after the cutoff point D) relies on accurate estimate of the discount rate

4. The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? A. salvage value B. wasted value C. sunk cost D. opportunity cost E. erosion

40. The profitability index is most closely related to which one of the following? A. payback B. discounted payback C. average accounting return D. net present value E. modified internal rate of return

45. Decreasing which one of the following will increase the acceptability of a project? A. sunk costs B. salvage value C. depreciation tax shield D. equivalent annual cost E. accounts payable requirement

45. Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? A. profitability index B. internal rate of return C. payback D. net present value E. accounting rate of return

46) The average annual return over the period 1926-2009 for small stocks is 21.2%, and the standard deviation of returns is 21.2%. Based on these numbers, what is a 95% confidence interval for 2010 returns? A) -10.6%, 31.8% B) 0%, 42.4% C) -21.2%, 42.4% D) -21.2%, 63.6%

47) McCoy paid a one-time special dividend of $3.40 on October 18, 2010. Suppose you bought McCoy stock for $47.00 on July 18, 2010, and sold it immediately after the dividend was paid for $63.52 . What was your realized return from holding McCoy? A) 4.24% B) 6.36% C) 33.91% D) 42.38%

47. The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? A. initial cost of each project B. timing of the cash inflows C. total cash inflows of each project D. required rate of return E. length of each project's life

5) A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist? A) Hoist A, since it has a greater present value (PV). B) Hoist B, since it has a greater present value (PV). C) Hoist A, since it has a greater equivalent annual annuity. D) Hoist B, since it has a greater equivalent annual annuity.

5) Disposition effect is the tendency of individual investors to ________. A) trade too much based on the mistaken belief that they can pick winners and losers better than investment professionals B) buy stocks that have been in the news, advertised more, have very high trading volume, or recently had extreme (high or low) returns C) put too much weight on their own experience rather than considering historical evidence D) hold on to stocks that have lost value and sell stocks that have risen in value since the time of purchase

73. Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $304,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the net income from this proposed project? A. $18,508.75 B. $40,211.24 C. $66,441.67 D. $123,391.67 E. $136,709.48

5) On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbroʹs share price, was this a reasonable action? A) No, since the constant dividend growth rate gives a stock estimate of $37.50. B) No, since the constant dividend growth rate gives a stock estimate greater than $37.50. C) Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50. D) No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

5) Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

5) Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment? A) internal rate of return (IRR) B) profitability index C) net present value (NPV) D) payback period

51. Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. discounted payback B. profitability index C. internal rate of return D. payback E. average accounting return

52. The market risk premium is computed by: A. adding the risk-free rate of return to the inflation rate. B. adding the risk-free rate of return to the market rate of return. C. subtracting the risk-free rate of return from the inflation rate. D. subtracting the risk-free rate of return from the market rate of return. E. multiplying the risk-free rate of return by a beta of 1.0.

52. Which two methods of project analysis were the most widely used by CEO's as of 1999? A. net present value and payback B. internal rate of return and payback C. net present value and average accounting return D. internal rate of return and net present value E. payback and average accounting return

53. Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,460,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,500,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? A. $0 B. $617,000 C. $1,460,000 D. $1,500,000 E. $1,619,000

54. Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion? A. $600,000 B. $1,200,000 C. $1,800,000 D. $2,400,000 E. $3,900,000

54. The _____ of a security divided by the beta of that security is equal to the slope of the security market line if the security is priced fairly. A. real return B. actual return C. nominal return D. risk premium E. expected return

57. The Beach House has sales of $784,000 and a profit margin of 11 percent. The annual depreciation expense is $14,000. What is the amount of the operating cash flow if the company has no long-term debt? A. $68,760 B. $72,240 C. $86,240 D. $100,240 E. $101,760

58. You want your portfolio beta to be 0.95. Currently, your portfolio consists of $4,000 invested in stock A with a beta of 1.47 and $3,000 in stock B with a beta of 0.54. You have another $9,000 to invest and want to divide it between an asset with a beta of 1.74 and a risk-free asset. How much should you invest in the risk-free asset? A. $4,316.08 B. $4,425.29 C. $4,902.29 D. $4,574.71 E. $4,683.92

59. You have a $12,000 portfolio which is invested in stocks A and B, and a risk-free asset. $5,000 is invested in stock A. Stock A has a beta of 1.76 and stock B has a beta of 0.89. How much needs to be invested in stock B if you want a portfolio beta of 1.10? A. $3,750.00 B. $4,333.33 C. $4,706.20 D. $4,943.82 E. $5,419.27

6) A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%? A) Yes, since it will pay back its initial investment in two years. B) Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. C) Yes, since the cash flows after two years are greater than the initial investment. D) No, since the value of the cash flows over the first two years are less than the initial investment.

6) A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%? A) -$21,885 B) -$25,533 C) -$29,180 D) -$36,475

79. What is the standard deviation of the returns on a portfolio that is invested in stocks A, B, and C? Twenty five percent of the portfolio is invested in stock A and 40 percent is invested in stock C. A. 6.31 percent B. 6.49 percent C. 7.40 percent D. 7.83 percent E. 8.72 percent

6) An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A) the amount obtained by renting the sixth floor B) the cost of refurbishing the new space to be occupied by the Human Resources Department C) cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces D) the cost of the research into the feasibility of renting the sixth floor

6) Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential ʺblockbusterʺ drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cureʹs blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cureʹs drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cureʹs blockbuster drug? A) $100 million B) $0 C) $1 billion D) $400 million

6) Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the companyʹs free cash flow is expected to grow at a rate of 9%. After that time, the companyʹs free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporationʹs expected free cash flow in year 2? A) $1429.79 million B) $86.61 million C) $1572.77 million D) $96.24 million

6) The excess return is the difference between the average return on a security and the average return for ________. A) Treasury bonds B) a portfolio of securities with similar risk C) a broad-based market portfolio like the S&P 500 index D) Treasury bills

6. The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project in financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

60. Bi-Lo Traders is considering a project that will produce sales of $28,000 and increase cash expenses by $17,500. If the project is implemented, taxes will increase by $3,000. The additional depreciation expense will be $1,600. An initial cash outlay of $1,400 is required for net working capital. What is the amount of the operating cash flow using the top-down approach? A. $4,500 B. $5,900 C. $6,100 D. $7,500 E. $8,900

66. Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no longer needs these assets so it is going to sell them today for $25,000. The assets are classified as 5-year property for MACRS. What is the net cash flow from this sale if the firm's tax rate is 30 percent? A. $13,122.20 B. $18,576.00 C. $20,843.68 D. $23,072.80 E. $25,211.09

68. Edward's Manufactured Homes purchased some machinery 2 years ago for $319,000. These assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $140,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 35 percent? A. $135,408 B. $140,000 C. $142,312 D. $144,592 E. $146,820

7) A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%? A) -$3155 B) -$3606 C) -$4057 D) -$4507

7) An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose? A) Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1% B) Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3% C) Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0% D) Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2%

7) Suppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $2 today and then you sold it for $100. What was your dividend yield and capital gains yield on the investment? A) 2%, 2% B) 0%, 2% C) 3%, 2% D) 2%, 0%

70. Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $73,000 a year for 7 years. At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $249,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $48,000 aftertax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14.5 percent? A. $77,211.20 B. $79,418.80 C. $82,336.01 D. $84,049.74 E. $87,925.54

70. You own a portfolio with the following expected returns given the various states of the economy. What is the overall portfolio expected return? A. 6.49 percent B. 8.64 percent C. 8.87 percent D. 9.05 percent E. 9.23 percent

71. What is the expected return on a portfolio which is invested 25 percent in stock A, 55 percent in stock B, and the remainder in stock C? A. -1.06 percent B. 2.38 percent C. 2.99 percent D. 5.93 percent E. 6.10 percent

8) A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision? A) No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. B) Yes, since if the estimates for each parameter are correct , the EBIT will be positive. C) Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). D) It cannot be determined whether the decision was correct, since other factors contributing to the projectʹs net present value (NPV), such as the upfront investment, have not been included in the analysis.

8. The depreciation tax shield is best defined as the: A. amount of tax that is saved when an asset is purchased. B. tax that is avoided when an asset is sold as salvage. C. amount of tax that is due when an asset is sold. D. amount of tax that is saved because of the depreciation expense. E. amount by which the aftertax depreciation expense lowers net income.

82. Home Furnishings Express is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount. The company will also spend $450,000 for a building contractor to expand the size of its showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000. For the project analysis, what amount should be used as the initial cash flow for net working capital? A. -$39,000 B. -$70,000 C. -$156,000 D. -$219,000 E. -$391,000

83. You would like to combine a risky stock with a beta of 1.68 with U.S. Treasury bills in such a way that the risk level of the portfolio is equivalent to the risk level of the overall market. What percentage of the portfolio should be invested in the risky stock? A. 32 percent B. 40 percent C. 54 percent D. 60 percent E. 68 percent

89. Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock? A. 8.35 percent B. 9.01 percent C. 10.23 percent D. 13.21 percent E. 13.73 percent

9) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 MACRS Depreciation Rate 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% A textile company invests $10 million in an open-end spinning machine. This was depreciated using the seven-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $7 million, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A) $1,550,400 B) $3,124,000 C) $3,876,000 D) $5,449,600

9) A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case? A) 10.40 months B) 15.60 months C) 19.50 months D) 26.00 months

9) A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract? A) Yes, since net present value (NPV) is positive. B) It does not matter whether the contract is taken or not, since NPV = 0. C) Yes, since net present value (NPV) is negative. D) No, since net present value (NPV) is negative.

96. Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 19,740 of these campers per year at $11,280 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year. What is the amount that should be used as the annual sales figure when evaluating this project? A. $297,613,400 B. $301,002,300 C. $314,141,800 D. $323,839,400 E. $327,289,500

99. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 8 percent. Your goal is to create a portfolio with an expected return of 12.4 percent. All money must be invested. How much will you invest in stock X? A. $800 B. $1,200 C. $4,600 D. $8,800 E. $9,200

Time: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Discount Rate Investment A: -$1.5 million $300,000 $300,000 $300,000 $500,000 $500,000 8% Investment B: -$1.3 million $500,000 $400,000 $300,000 $200,000 $100,000 7% 13) An investor is considering the two investments shown above. Which of the following statements about these investments is true? A) The investor should take investment A since it has a greater net present value (NPV). B) The investor should take investment A since it has a greater internal rate of return (IRR). C) The investor should take investment B since it has a greater net present value (NPV). D) Neither investment should be taken since they both have a negative net present value (NPV).

Which of the following is NOT a step in the WACC valuation method? A) Computer the weighted average cost of capital B) Discount the incremental free cash flows of the investment using the weighted average cost of capital C) Determine the incremental free cash flows of the investment D) Determine the mean weighted average cost of capital for the firm's industry

D) Determine the mean weighted average cost of capital for the firm's industry

Which of the following statements is FALSE? A) When stocks are perfectly positively correlated, the set of portfolios is identified graphically by a straight line between them. B) An investor seeking high returns and low volatility should only invest in an efficient portfolio. C) When the correlation between securities is less than 1, the volatility of the portfolio is reduced due to diversification. D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

D) Efficient portfolios can be easily ranked, because investors will choose from among them those with the highest expected returns.

Which of the following statements is FALSE? A) The firm's weighted average cost of capital, denoted rwacc, is the cost of capital that reflects the risk of the overall business, which is the combined risk of the firm's equity and debt. B) Intuitively, the difference between the discounted free cash flow model and the dividend-discount model is that in the divided-discount model the firm's cash and debt are included indirectly through the effect of interest income and expenses on earnings in the dividend-discount model. C) We interpret rwacc as the expected return the firm must pay to investors to compensate them for the risk of holding the firm's debt and equity together. D) When using the discounted free cash flow model we should use the firm's equity cost of capital.

D) When using the discounted free cash flow model we should use the firm's equity cost of capital.

When the projected liabilities and equity are greater than the assets, the firm can plan to A) retain extra cash. B) pay dividends. C) retire debt. D) all of the above

D) all of the above

Building a model for long-term forecasting reveals points in the future where the firm will have: A) excess cash that can be used for dividends, debt repayment, or stock repurchases. B) cash needs that must be funded with external financing. C) a need for expanding property, plant and equipment to meet increases in capacity. D) all of the above.

D) all of the above.

DO NOT STUDY PAST THIS LINE

A levered firm is one that has ________ outstanding.

Debt

If a firm is planning an expansion or changes in how it manages its inventory, long term financial planning can help determine the impact of the firm's

Debt financing, capital investment, free cash flows

As we increase the number of stocks in a portfolio, the standard deviation of returns of the portfolio ______________.

Decreases

Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________ a risk premium for bearing it.

Do not require

102. Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $61,200. The sausage system will save the firm $122,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,560. All of the net working capital will be recovered at the end of the project. The tax rate is 33 percent and the discount rate is 9 percent. What is the net present value of this project? A. -$41,311 B. -$7,820 C. $81,507 D. $98,441 E. $118,821

102. Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in Stock B. What is the standard deviation of your portfolio given the following information? A. 12.38 percent B. 12.64 percent C. 12.72 percent D. 12.89 percent E. 13.73 percent

103. You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock? A. 0.75 B. 0.80 C. 0.94 D. 1.00 E. 1.10

106. Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent? A. 11.47 percent B. 12.38 percent C. 16.67 percent D. 24.29 percent E. 29.99 percent

108. Consider the following information on Stocks I and II: The market risk premium is 8 percent, and the risk-free rate is 3.6 percent. The beta of stock I is _____ and the beta of stock II is _____. A. 2.08; 2.47 B. 2.08; 2.76 C. 3.21; 3.84 D. 4.47; 3.89 E. 4.47; 4.26

11. A project has a net present value of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return. B. The project requires no initial cash investment. C. The project has no cash flows. D. The summation of all of the project's cash flows is zero. E. The project's cash inflows equal its cash outflows in current dollar terms.

14. G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. opportunity B. fixed C. incremental D. erosion E. sunk

17. You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost.

18. The bid price is: A. an aftertax price. B. the aftertax contribution margin. C. the highest price you should charge if you want the project. D. the only price you can bid if the project is to be profitable. E. the minimum price you should charge if you want to financially breakeven.

18. Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? A. profitability index less than 1.0 B. project's internal rate of return less than the required return C. discounted payback period greater than requirement D. average accounting return that is less than the internal rate of return E. modified internal rate of return that exceeds the required return

19. Which one of the following will increase a bid price? A. a decrease in the fixed costs B. a reduction in the net working capital requirement C. a reduction in the firm's tax rate D. an increase in the salvage value E. an increase in the required rate of return

75. You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $180,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the 3-year project life. The equipment can be sold at the end of the project for $34,000. You will also need $20,000 in net working capital for the duration of the project. The fixed costs will be $16,000 a year and the variable costs will be $168,000 per park. Your required rate of return is 15 percent and your tax rate is 34 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100) A. $72,500 B. $128,600 C. $154,300 D. $189,100 E. $217,600

78. A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and $7,500 over three years, respectively. What is the discounted payback period if the required rate of return is 16 percent? A. 2.31 years B. 2.45 years C. 2.55 years D. 2.62 years E. never

8. There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: A. have two net present value profiles. B. have operational ambiguity. C. create a mutually exclusive investment decision. D. produce multiple economies of scale. E. have multiple rates of return.

81. The Card Shoppe needs to maintain 23 percent of its sales in net working capital. Currently, the shoppe is considering a 6-year project that will increase sales from its current level of $387,000 to $421,000 the first year and to $465,000 a year for the following 5 years of the project. What amount should be included in the project analysis for net working capital in year 6 of the project? A. -$17,940 B. -$2,990 C. $0 D. $2,990 E. $17,940

82. Your portfolio has a beta of 1.12. The portfolio consists of 20 percent U.S. Treasury bills, 50 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B? A. 1.47 B. 1.52 C. 1.69 D. 1.84 E. 2.07

86. The common stock of Jensen Shipping has an expected return of 16.3 percent. The return on the market is 10.8 percent and the risk-free rate of return is 3.8 percent. What is the beta of this stock? A. .92 B. 1.23 C. 1.33 D. 1.67 E. 1.79

88. The expected return on JK stock is 15.78 percent while the expected return on the market is 11.34 percent. The stock's beta is 1.62. What is the risk-free rate of return? A. 3.22 percent B. 3.59 percent C. 3.63 percent D. 3.79 percent E. 4.18 percent

9. The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. yearly incremental costs B. sunk costs C. opportunity costs D. erosion cost E. equivalent annual cost

90. The common stock of Alpha Manufacturers has a beta of 1.47 and an actual expected return of 15.26 percent. The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent. Which one of the following statements is true given this information? A. The actual expected stock return will graph above the Security Market Line. B. The stock is underpriced. C. To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent. D. The stock has less systematic risk than the overall market. E. The actual expected stock return indicates the stock is currently overpriced.

98. Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 11-year tax life. The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $22,000. The relevant tax rate is 30 percent. What is the aftertax cash flow from the sale of this asset? A. $31,800 B. $32,600 C. $33,300 D. $34,100 E. $34,600

1) If you value a stock using a range of stock valuation methods and these valuations indicate a stock price that is greater than its actual market price, it is most likely that the stock is under-valued.

FALSE

1) Individual investors trade conservatively, given the difficulty of finding over-valued and under-valued stocks

FALSE

1) Preference for cash today versus cash in the future in part determines net present value (NPV).

FALSE

1) When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

FALSE

2) Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

FALSE

2) Internal rate of return (IRR) can reliably be used to choose between mutually exclusive projects.

FALSE

2) The internal rate of return (IRR) rule will agree with the Net Present Value rule even when positive cash flows precede negative cash flows.

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