Aditya
Question 1-10 are True & False Questions which carry 1 point weight each.
1. An investment's investment's average net net income divided divided by its its average book book value is the Payback Payback period. A. True B. False 2. The method method of financi financing ng a project project affects affects the the determina determination tion of of its cash cash flows. flows. A. True B. False 3. Sunk costs costs do not influence influence capital capital budgeting budgeting decisio decisions ns unless unless they are larger larger than future future Cash inflows A. True B. False 4. Capital budgeting analysis analysis focuses on profits profits as opposed to cash flows. flows. C. True D. False 5. If a project permits a reduction in the level of working working capital, this this reduction is is assumed to increase increase cash flows C. True D. False 6. Accurate Accurate capital capital budgeting budgeting analysis analysis depend dependss on total cash flows flows as opposed opposed to incremental incremental cash flows. C. True D. False 7.
For mutually mutually exclusive exclusive projects, the project with the higher NPV is always the correct Selection, regardless of IRR. A. True B. False
8.
When calculating calculating IRR with a trial and and error process, process, discount rates rates should be lowered if NPV is still positive. A. True B. False
9.
When using using a profitability index to select projects, projects, a value of of 0.63 is preferred over a value of 0.21. A. True B. False
10.
A project's payback period is the length length of time necessary to generate an NPV of of zero A. True B. False
1
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Aditya
Question 11-20 are multiple choice Questions which carry 2 points weight each.
11. All other things things being equal, equal, the sensitivity of the price of an annual coupon bond bond with a Fixed maturity to a change in interest rates can best be described as: A) The shorter the time to maturity, maturity, the greater the sensitivity sensitivity of bond bond price to a change in interest rates. B) Bond price is is sensitive to maturity and the coupon coupon level, level, but not to interest rates. C) The longer longer the time to maturit maturity, y, the greater greater the sensitivi sensitivity ty of bond price price to a change in interest rates. D) None None of of the the abov above. e. 12.
According to the valuation valuation approaches we have covered covered so far, far, and all other things things being Equal, an increase in interest rates would A) B) C) D)
Reduce the price of corporate bonds. Reduce Reduce the price of preferr preferred ed stock. stock. Reduce Reduce the the price price of commo common n stock. stock. all all of of the the abov abovee
13. The sustainable sustainable growth rate is equal to: A) The plowback ratio times the return on equity equity B) The return on equity divided divided by the plowback ratio ratio C) The return on assets assets times the plowback plowback ratio D) The plowback ratio times times the return on equity times times the ratio of equity to assets assets 14. You are considering considering an investment investment with the following following cash flows. flows. Your required return return is 10%; you you require a payback of three years and a discounted discounted payback of four years. years. If your objective is to maximize your wealth, should you take this investment? Year 0 1 2 Cash Flow -$100,000 -$100,000 $40,000 $40,000 $40,000 $40,000 A) B) C) D) E)
3 $40,000 $40,000
4 $40,000 $40,000
5 -$50,000 -$50,000
Yes, Yes, becaus becausee the the paybac payback k is 2.5 2.5 years years.. Yes, because because the the discoun discounted ted paybac payback k is four years. years. Yes, because because both both the paybac payback k and the the discounte discounted d payback payback are less less than than two years. years. No, No, becaus becausee th thee NPV NPV is is negat negative ive.. No, because because the the project project has has a large large negative negative cash flow flow at the end end of its its life. life.
15. Randy's Manufacturing Manufacturing is considering considering two mutually exclusive exclusive projects. The company has a required rate of return of 13.5% on projects of this nature. Project A costs $100,000 and has an IRR of 14.5%. Project B costs $150,000 and has an IRR of 14%. Which project should be accepted and why? A) Project Project A because because it it costs costs less less and has has a higher higher IRR IRR than Project Project B B) Project Project A because because it has the highest highest IRR IRR of two projects projects and and exceeds exceeds the required required retu
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Aditya
16.
Ginny Ginny is con consid sideri ering ng two two indepe independe ndent nt proj project ects. s. Each Each proje project ct cost costss $10,00 $10,000. 0. Projec Projectt A produc produces es cash inflows of $3,000 a year for four years. Project B produces no cash flows for the first two years and $6,000 a year for the following two years. Ginny wants to recoup her money within 3 years. Should Ginny accept these projects? A) B) C) D) E)
Ginny Ginny shou should ld accep acceptt both both proj project ects. s. Ginny Ginny should should accept Project Project A and reject reject Project Project B. Ginny Ginny should should reject reject Project Project A and and accept accept Project Project B. Ginny Ginny should should rej reject ect both both proj project ects. s. Ginny Ginny cannot cannot make that decisi decision on based based on the the informat information ion provid provided. ed.
17. All other things being equal, if the inflation rate goes up, the observed risk less interest rate A) B) C) D) 18.
is unaf unaffec fecte ted. d. Goes oes dow down n. Goe Goes up up. Need Need more more info informa rmatio tion n
In a general sense, the value of any project is the A) Value of the dividends dividends received received from the project since its inception. B) Present value of the cash flows you expect to receive from the project over its remaining life. C) Value of of past dividend dividendss and price increas increases es for the project. project. D) Future value of the the cash flows you you expect to receive receive from the project over its remaining life.
19.
The return measure that that an investor demands for for giving giving up current use use of funds, without Adjusting for risk or purchasing power changes, is the A) B) C) D)
20.
Risk Risk prem premiu ium. m. Infl Inflat atio ion n premi premium um.. Real Real rate rate of ret return urn.. Disc Discou ount nt rate rate..
The cost of capital for a new project should be determined with reference to A) B) C) D)
The cost of of the specific specific kind of financing used to implement the project. The weighted average cost of capital of firms facing similar risks to this project. The The prim primee bank bank rat rate. e. None None of of the the abov above. e.
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Aditya
21.
When doing financial discounting problems that involve payments, annuities and valuations at various points in time, it is frequently useful to describe the business situation we are facing using a:
Equations. Written description. Time line. None of the above. 22.
If in searching for the the yield yield to to maturity maturity on a bond bond with with a stated stated coupon coupon rate and and a known Market price you get a value below the current market price, then in the next calculation To correctly determine the bond’s yield to maturity you should try A) B) C) D)
A highe higherr inter interest est rate. rate. A lower interest rate. A long longer er mat matur urit ity. y. A higher higher coup coupon on payme payment. nt.
23.
A tax tax shield shield is equal equal to to the the reduction reduction in A. Taxable income resulting from a deductible expense. B. Cash flow from an expense. C. Net income. D. Tax liability resulting from a deductible expense.
24.
Firms that that make make investment investment decisions based upon the payback rule may be biased Toward rejecting projects: A. With short lives. B. With long lives. C. With undiscounted cash flows. D. That are mutually exclusive.
25.
A project has an initial cash outlay outlay of $29,500. Cash inflows are estimated at $1,200, $1,200, $6,900, $7,800, $9,500, and $4,800 for years 1 through 5, respectively. What is the net present value of this project given a 7% discount rate? A) -$5,67 ,677.15 .15 B) -$5,314.82 C) -$2,618.03 D) $700.00 E) $1,806.33
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Aditya
Question 21-40 are MC questions with workings which carry 3 points weight each. Any answer in this section without working WILL NOT BE EVALUATED. Support your answers for the following questions with adequate workings in the space provided here. Answers without workings will not be evaluated.
26.
.
. . .
If a project is expected to increase inventory by $20,000, increase accounts payable by $12,000, and increase accounts receivable by $6,000, what effect does working capital have during the life of the project? Give illustration for your answer here.
Increases investment by $14,000 . Increases investment by $20,000. Increases investment by $12,000. Working capital has no effect during the life of the project.
27.
Which of the following statements is most likely correct for for a project costing $50,000 and returning $14,000 per year for five years? Demonstrate. A. B. C. D.
28.
What is the approximate approximate IRR for a project that that costs costs $4,356 and provides provides cash inflows st nd Of $1,000 in the 1 year, $ 2000 in the 2 year and $3,000 in the 3 rd year. Show. A. B. C. D.
29.
NPV NPV = $36, $36,27 274 4. NPV NPV = $20, $20,00 000 0. IRR = 1.4%. IRR is greate greaterr than than 10%. 10%.
20.0% 22.0% 15.0% none none of the the abo above ve
L& T has undertaken undertaken two mutually exclusive exclusive projects. projects. Which one of them should should be selected if both are priced at $1,000 and the discount rate is 15%; Project A with three annual cash flows of $1,000, or Project B, with three years of zero cash flow followed by three years of $1,500 annually? A. Project A.
B. Project B. B. C. The IRRs IRRs are are equal, equal, hence hence you you are indifferen indifferent. t. D. The NPVs NPVs are equal equal,, hence you are are indiffere indifferent. nt. 30.
A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity? Show. A) 11.50 .50%
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31.
What is the NPV of of a project that costs $100,000, provides provides $23,000 in cash flows annually annually for six years, requires a $5,000 increase in net working capital, and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%. Prove your answer. A. B. C. D.
31.
What is the amount of the cash cash flow for for a firm with with $50,000 profit before tax, $20,000 depreciation expense, and a 35% marginal tax rate? Demonstrate. A. B. C. D.
32.
-$15,56 ,561 $-13 -13,28 ,283 $13,283 $15,561
$50,000 $30,000 $39,500 $70,000
For a profitable profitable firm in the 30% marginal tax bracket with $20,000 of annual depreciation depreciation expense, the depreciation tax shield will be: (Demonstrate) A. $ 9,000 ,000.0 .00 0 B. $ 3,0 3,00 00.00 .00 C. $20.0 20.00 00.00 .00 D. $ 6,000 ,000.0 .00 0
33. A 15-year bond pays 11% on a face value of $1,000. $1,000. If similar bonds are currently yielding yielding 8%, what is the market value of the bond? Prove. A. $1,000 B. $ 909 C. $1,350 D. $1,375 34.
Find out the Duration of a bond bond at the discounting rate of 15%. 15%. This bond carries coupon rate of 10%, has a face value of $100 per bond and maturity of three years. PV at 15% for the 1 st year = 0.870, 2nd year= 0.757 and the 3rd year is 0.658. A. 3 years B. 10 years C. 15 years D. 2.72 .72 yea years
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35. Last year Simon Inc. Inc. reported total assets assets of $200, equity equity of $70, net income income of $50, dividends dividends of $15 and retained earnings of $35. What is Simon Inc's sustainable growth rate? a) 25% b) 57.1% c) 50.0% d) 71.4% 36. Given the following information, information, what what is WBM Corporation's WACC? Common Stock: 1 million shares outstanding, $40 per share, $1 par value, beta = 1.3 Bonds: 10,000 bonds outstanding, outstanding, $1,000 face value each, 8% annual coupon, 22 years to maturity, market price = $1,101.23 per bond Market risk premium = 8. 6%, risk-free rate = 4. 5%, marginal tax rate = 34% A) 7.89% B) 9.90% C) 12.19% D) 13.30% E) 15.78% 37. RMB, Inc. sold a 20-year 20-year bond at par par 12 years ago. The bond pays an 8% annual coupon, has a $1,000 face value, and currently sells sells for $893.30. What is the firm's cost of debt? debt? A) 8.0% B) 9.2% C) 9.5% D) 10.0% E) 10.5% 38. Anthony's Antiques, Antiques, Inc. has preferred stock outstanding which pays a dividend of $4 per share a year. The current stock price is $32 per share. What is the cost cost of preferred stock? stock? A) 8.0% B) 9.0% C) 10.0% D) 11.0% E) 12.5% 39.
Suppos Supposee a firm firm has has 10.4 10.4 milli million on shar shares es of common common stoc stock k outst outstand anding ing with with a par par value value of of $1 per per share. The current market price price per share is $12. $12. The firm has outstanding outstanding debt with with a par
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Aditya
40.
A firm firm has has 2,000, 2,000,000 000 shar shares es of common common stock stock outst outstand anding ing with with a marke markett price price of of $2 per per share share.. It has 2,000 bonds outstanding, outstanding, each selling for for $1,200. The bonds mature in 15 years, years, have a coupon rate of 10%, and pay coupons coupons annually. The firm's beta is 1.2, the risk free free rate is 5%, and the market market risk premium premium is 7%. 7%. The tax rate is 34%. 34%. Calculate the WACC. A) 5.42% B) 6.53% C) 9.36% D) 10.28% E) 11.57%