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1) which of the following investment opportunities has the highest present value if the
discount rate is 10%?
a.investment a
b.investment b
c.investment c
d.the present value of investments a and c are equal and higher than the present value of
investment b
2) narrbegin: far corporation
far corporation
far corporation is considering a new project to manufacture widgets. the cost of the
manufacturing equipment is $150,000. the cost of shipping and installation is an
additional $15,000. the asset will fall into the 3-year macrs class. the year 1-4 macrs
percentages are 33.33%, 44.45%, 14.81%, and 7.41%, respectively. sales are expected
to be $300,000 per year. cost of goods sold will be 80% of sales. the project will require
an increase in net working capital of $15,000. at the end of three years, far plans on
ending the project and selling the manufacturing equipment for $35,000. the marginal
tax rate is 40% and far corporations appropriate discount rate is 12%.
narrend
refer to far corporation. what is the depreciation expense in year 3?
a.$49,995
b.$22,215
c.$11,115
d.$66,675
3) narrbegin: gamma electronics
gamma electronics
gamma electronics is considering the purchase of testing equipment that will cost
$500,000 to replace old equipment. assume the new machine will generate after-tax
savings of $250,000 per year over the next four years.
narrend
if gamma electronics has a 15% cost of capital, whats the profitability index of the
investment?
a.1.4
b.0.4
c.2.0
d.1.0
4) narrbegin: exhibit 8-1 invst csh prj
exhibit 8-1
the cash flows associated with an investment project are as follows:
narrend
refer to exhibit 8-1. whats the payback period of the project? if a firms cutoff payback
period is 3 years, should it accept the project?
a.2.7 years; reject the project
b.2.7 years; accept the project
c.3.6 years; reject the project
d.3.6 years; accept the project
5) prudent policy life insurance co. offers a 10-year term life insurance policy with a
$250,000 benefit and annual premiums of $200, paid at the beginning of each year. if
prudent can earn 8% on invested capital, what is the future value to the firm of the
premiums from one policy, assuming the policy holder outlives the policy term?
a.$3,129
b.$2,897
c.$2,720
d.$1,342
6) which of the following terms describes when a firm's liabilities exceed the fair
market value of its assets?
a.bankruptcy
b.insolvency bankruptcy
c.liquidity crisis
d.economic failure
e.technical insolvency
7) zeb corporation just paid a dividend of 3.11 and has an expected growth rate of 12%
for the foreseeable future, if the discount rate is 18% what is the appropriate stock price
today?
a.$58.05
b.$51.83
c.$57.87
d.$55.06
8) in the united states the expected rate of inflation is 4% and in canada the expected
rate of inflation is 8%. the risk-free rate of interest in the u.s. is 3%. what would the
risk-free interest rate have to be in canada for real interest rate parity to hold?
a.9.05%
b.3.0%
c.4.0%
d.6.96%
9) which is not a feature of common stock?
a.voting rights
b.priority over debt holders for liquidation rights
c.rights to dividends and other distributions
d.majority voting system
10) a lease that results when a lessor acquires the assets that are leased to a given lessee
is known as a:
a.direct lease
b.sale-leaseback arrangement
c.leverage lease
d.none of the above
11) the option to withdraw resources from projects that fail to live up to short-run
expectations is know as a(n):
a.expansion option
b.abandonment option
c.follow-on investment option
d.flexibility option
12) narrbegin: exhibit 12-1
exhibit 12-1
an all-equity firm has 80,000 shares outstanding worth $20 each. the firm is considering
a project requiring an investment of $500,000 and has an npv of $30,000. the company
is also considering financing this project with a new issue of equity.
narrend
refer to exhibit 12-1. what is the price at which the firm needs to issue the new shares so
that the existing shareholders are indifferent to whether the firm takes on the project
with this equity financing or does not take on the project?
a.$18.44
b.$18.87
c.$19.71
d.$20.00
13) digit! corporation has the following financial information: its profit margin is 10%,
its total asset turnover is 1.75, its assets to equity ratio is 1.5, and it pays out 35% of its
earnings in dividends. what is its sustainable growth rate?
a.22.10%
b.20.57%
c.9.75%
d.47.39%
14) narrbegin: exhibit 22-1 liquidation
exhibit 23-1
narrend
if the company has $2,475,000 in funds to distribute to unsecured creditors, how much
do the owners of the firm receive in case iii?
a.$75,000
b.$0
c.$150,000
d.$225,000
15) narrbegin: smart hh measures
smart products
suppose smart products has three divisions which contribute 40, 35, and 25 percent each
to its revenues.
narrend
what is smart products herfindahl index on focus?
a.1.0
b.0.40
c.0.345
d.0.333
16) if absolute priority rules are enforced in a chapter 7 bankruptcy, which of the
following is least likely to receive payment?
a.local, state, or federal governments owed taxes
b.owners of common stock
c.owners of bonds
d.banks holding loans secured by collateral
17) as a result of an injury settlement with your insurance you have the choice between
(1)receiving $5,000 today or
(2)$6,500 in three years.
if you could invest your money at 8% compounded annually, which option should you
pick?
a.(1), because it has a higher pv
b.you are indifferent between the two choices
c.(2), because it has a higher pv
d.you do not have enough information to make that decision
18) natural growth, or internal expansion into a new market is also called
a.acquired entry
b.merged entry
c.greenfield entry
d.entrepreneurial entry
