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1. A situation in which taking one investment prevents the taking of another is called:

a. Net present value profiling.

b. Operational ambiguity.

c. Mutually exclusive investment decisions.

d. Issues of scale.

e. Multiple rates of return.

c. Mutually exclusive investment decisions.

2. For a project with conventional cash flows, if NPV is greater than zero, then:

a. The IRR is equal to the firm's required rate of return.

b. The IRR is greater than the firm’s required rate of return.

c. The payback period is longer than the firm's required cutoff point.

d. The IRR is less than the firm’s required rate of return. e. The IRR is zero.

b. The IRR is greater than the firm’s required rate of return.

3. The profitability index (PI) rule can be best stated as:

a. An investment is acceptable if its PI is greater than one.

b. An investment is acceptable if its PI is less than one.

c. An investment is acceptable if its PI is greater than the internal rate of return (IRR).

d. An investment is acceptable if its PI is less than the net present value (NPV).

a. An investment is acceptable if its PI is greater than one.

4. Woodgate Inc. is considering a project with the following after-tax operating cash flows (in millions of dollars):

Year Cash Flow

0 -$300

1 125

2 75

3 200

4 100

The project has a discount rate of 10%. What is the project’s IRR?

a. 10.00%

b. 16.83%

c. 19.12%

d. 23.42%

e. 24.56%

d. 23.42%

5. Woodgate Inc. is considering a project with the following cash flows (in millions of dollars):

Year Cash Flow

0 -$300

1 125

2 100

3 100

4 100

What is the project’s payback period?

a. 2.00 years

b. 2.50 years

c. 2.75 years

d. 2.83 years

e. 3.00 years

c. 2.75 years

6. For a project with an initial investment of $40,000 and cash inflows of $11,000 a year for 5 years, calculate NPV given a required return of 11.65%.

a. $1,205.35

b. $1,103.94

c. $ 1.23

d. $ 567.07

e. $1,218.12

c. $ 1.23

I. Remaining in the class means you must give up your part-time job.

II. The tuition cost for the class was outrageous, $1,000 per credit hour.

III. If you drop the class, you can sell the textbook now for $30 at the bookstore.

a. I only

b. I and II only

c. I and III only

d. II and III only

e. I, II, and III

a. Salvage value expense.

b. Net working capital expense.

c. Sunk cost.

d. Opportunity cost.

e. Erosion cost

a. Benefit-cost analysis

b. Erosion planning

c. Opportunity cost analysis

d. Sensitivity analysis

e. Scenario analysis

a. $700,000

b. $310,000

c. $201,500

d. $901,500

e. None of the above

a. $1,010

b. $3,510

c. $5,010

d. $5,490

e. $6,990

a. $0

b. $20,000

c. $19,800

d. $40,200

a. Long-term corporate bonds.

b. US Treasury bills.

c. Long-term government bonds.

d. Common stock of the largest companies in the United States.

e. Common stock of the smallest companies listed on NYSE.

a. A has a lower variance than B.

b. A has a lower standard deviation than B.

c. A has a higher inflation premium than B.

d. A has a higher return volatility than B.

e. A must be one of the 500 largest stocks in the United States, while B must be one of the smallest firms listed on the NYSE.

a. Risk premium.

b. Return premium.

c. Excess return.

d. Average return.

e. Variance.

a. $ 2.66

b. $10.66

c. $72.34

d. $77.34

e. $82.66

a. Portfolio return.

b. Portfolio weight.

c. Portfolio risk.

d. Rate of return.

e. Investment value.

a. The Wall Street Journal reported that Gross Domestic Profit declined 4.9% during the latest quarter.

b. Today the dollar declined significantly in value against the Euro.

c. The Federal Reserve just made an unexpected announcement of a 0.5% increase in the Federal Funds rate.

d. The Chief Financial Officer of a widely known public corporation was charged by the Securities & Exchange Commission with manipulating the firm’s financial statements.

a. 0.25

b. 0.50

c. 0.75

d. 1.00

e. 1.25

a. 6.0%

b. 9.2%

c. 7.2%

d. 7.7%

e. 8.4%

A) 0.93

B) 0.98

C) 1.03

D) 1.08

E) 1.10

A) 14.00%

B) 15.00%

C) 16.00%

D) 17.00%

E) 18.00%

A) 6.6%

B) 6.8%

C) 5.8%

D) 7.0%

E) 7.5%

a. Long-term debt.

b. Common stock.

c. Retained earnings.

d. Accounts payable.

e. Preferred stock.

a. Newly issued common stock.

b. Long-term bonds.

c. Preferred stock.

d. Short-term notes payable.

e. Retained earnings.

a. Adjusting the discount rate upward if the project is judged to have above average risk.

b. Adjusting the discount rate downward if the project is judged to have above average risk.

c. Reducing the NPV by 10% for risky projects.

d. Picking a risk factor equal to the average discount rate.

e. Ignoring it because project risk cannot be measured accurately.

a. 6.75%

b. 7.35%

c. 7.84%

d. 8.60%

e. 9.45%

a. 3.2%

b. 3.7%

c. 4.0%

d. 4.7%

e. 31.3%

a. 0.157

b. 0.314

c. 0.686

d. 0.739

a. 9.5%

b. 10.0%

c. 10.8%

d. 11.6%

e. 12.0%

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