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1.Goals and Governance of the Firm

Multiple Choice Quiz(See related pages)

1Generally, a corporation is owned by its:

A)Managers

B)Board of Directors

C)Shareholders

D)All of the above.

2Financial markets serve which of the following functions?

A)Provide liquidity for investors

B)Allow investors to adjust risk exposure

C)Allow firms to manage risk

D)All of the above

3A firm's investment decision is also called the:

A)Financing decision

B)Capital budgeting decision

C)Liquidity decision

D)None of the above

4The treasurer usually oversees the following functions of a corporation except:

A)Preparation of financial statements

B)Investor relationships

Cash management

C)

D)Obtaining finances

5The treasurer is usually responsible the following functions of a corporation except:

A)Raising new capital

B)Cash management

C)Banking relationships

D)Internal accounting

6The following are advantages of separation of ownership and management of corporations except:

A)Corporations can exist forever.

B)Facilitate transfer of ownership without affecting the operations of the firm.

C)Hire professional managers

D)Incur agency costs

7The financial goal of a corporation is to:

A)Maximize sales

B)Maximize profits

C)Maximize the value of the firm

D)Maximize managers' benefits

8Agency costs are costs incurred when:

A)Managers do not attempt to maximize firm value.

B)Shareholders incur costs to monitor the managers and influence their actions.

C)Both A and B

None of the above

D)

9Which of the following is typically not considered a financial manager in a large corporation?

A)Chief Financial Officer

B)Treasurer

C)Controller

D)Auditor

10The difference in information held by managers, owners, and lenders is often referred to as what kind of information?

A)Asymmetric

B)Convergent

C)Private

D)Quality

11Generally, a corporation is owned by its shareholders.

A)True

B)False

12Shares owned and not traded on an exchange are sometimes referred to as:

A)Asymmetric

B)Closely Held

C)Private

D)Public

13What the name most often used in place of financial markets?

A)Bond markets

B)Capital markets

C)Options markets

D)Stock markets

14The controller typically does all of the following, expect:

A)Accounting

B)Prepare financial statements

C)Raise capital

D)Taxes

15Which of the following is typically considers an agency cost?

A)Audit

B)Cost of goods sold

C)Consultant fees

D)Taxes

2.How to Calculate Present Values

Multiple Choice Quiz(See related pages)

1The present value of $115,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is:

$121,000

A)

B)$100,500

C)$110,000

D)$104,545

2A two-year discount factor at a discount rate of 10% per year is:

A)0.826

B)1.000

C)0.909

D)0.814

3If the present value of $444 to be paid at the end of one year is $400, what is the one year discount factor?

A)0.9009

B)1.11

C)0.11

D)None of the above

4If you invest $100,000 today at 12% interest rate for one year, what is the amount you will have at the end of the year?

A)$90,909

B)$112,000

C)$100,000

D)None of the above

5The opportunity cost of capital for a risky project is

A)

The expected rate of return on a government security having the same maturity as the project

B)The expected rate of return on a well diversified portfolio of common stocks

C)The expected rate of return on a portfolio of securities of similar risks as the project

D)None of the above

6If the present value of the cash flow X is $200, and the present value cash flow Y is $150, then the present value of the combined cash flow is:

A)$200

B)$150

$50

C)

D)$350

7You are a charitable organization that plans to provide $100,000 per year in perpetuity to needy children. How much would a donor need to provide today to fund this goal? Assume that the first payment out of the charitable organization will start one year from today. The interest rate is 10%.

A)$1,000,000

B)$10,000,000

C)$100,000

D)None of the above

8What is the present value annuity due factor of $1 at a discount rate of 15% for 15 years?

A)5.8474

B)8.5143

C)7.1324

D)6.7245

9Find the present value of a perpetuity that pays $3.40 one year from now and is growing at a constant rate of 3%. The discount rate is 14%.

A)$3.40

B)$24.29

C)$30.91

D)$113.33

10Mr. Hopper is expected to retire in 28 years and he wishes accumulate $750,000 in his retirement fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the retirement fund at the end of each year in order to achieve this goal?

A)$4,559.44

B)$5,588.26

C)$9,118.88

D)$10,018.67

11John House has taken a $150,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for thirty equal annual payments, what is the amount of each payment?

A)$14,158.94

B)$10,897.34

C)$16,882.43

D)$17,657.35

12What is the present value of a perpetuity that pays $10 per year if the interest rate is 14%?

A)$10.00

B)$14.00

C)$65.76

D)$71.43

13A bank offers the following investments. Which do you prefer?

A)A stated rate of 10% continuously compounded

B)A stated rate of 10% compounded annually

C)A stated rate of 10% compounded semi-annually

D)A rate of 10% simple interest

14You invest $1,000 at a continuously compounded rate of 10%. What is the investment worth after 3 years?

A)$1,100.00

$1,349.86

B)

C)$1,331.00

D)$1,105.17

15Your credit card charges interest of 1.5% per month. The company will quote you an APR of what?

A)1.5%

B)12%

C)18%

D)None of the above.

3.Valuing bonds.

Multiple Choice Quiz(See related pages)

1If the nominal interest rate is 8% per year and the expected inflation rate is 3% per year, calculate the real rate of interest:

A)8%

B)5%

C)2.86%

D)4.85%

2A 5-year bond with 6% coupon rate and $1000 face value is selling for $852.10. Calculate the yield to maturity of the bond. (Assume annual interest payments.)

A)9.23%

B)4.91%

C)8.78%

D)9.89%

3Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 6%, and three years to maturity. This bond's duration is:

A)2.6 years

B)2.8 years

3.0 years

C)

D)3.2 years

4The term structure of interest rates can be described as the:

A)Relationship between the spot interest rates and the bond prices

B)Relationship between spot interest rates and stock prices

C)Relationship between spot interest rates and maturity of a bond

D)None of the above

5Comparing a 1-year bond and a 5-year bond, which will experience a larger price change in price if interests rate rise? Assume equivalent risk and identical coupons.

A)1 year bond

B)5 year bond

C)Both will change equally

D)More information is needed to answer this question.

6The expectations theory states that the forward interest rate is the:

A)Expected future spot rate

B)Always greater than the spot rate

C)Yield to maturity

D)None of the above

7If the yield to maturity is higher than the coupon rate, the bond price will be

A)Below par

B)Above par

C)At par

D)Cannot be determined

8Duration tells you

A)When you receive the final payment

B)When you receive the first payment

C)The average time to each payment

D)The average change in interest rates

9

The bid price is:

A)The price investors receive if they sell the bond

B)The price investors need to buy a bond

C)The profit the dealer makes when selling a bond

D)Both A and B are correct

10Which of the following statements is most consistent with expectations theory?

A)

If short-term rates are equal to long-term rates, then investors must be expecting short-term rates to rise.

B)

If short-term rates are higher than long-term rates, then investors must be expecting short-term rates to rise.

C)

If short-term rates are lower than long-term rates, then investors must be expecting short-term rates to rise.

D)None of the above

11A 5 year $1,000 par value bond pays a 6.50% annual coupon. Given a YTM of 8.0%, what is the price of the bond today?

A)$780

B)$860

C)$940

$1000

D)

12What is the expected YTM on a bond that pays a $15 coupon annually has a $1,000 par value, and matures in 6 years if the current price of the bond is $978?

A)1.89%

B)3.67%

C)9.78%

D)15.00%

13Volatility is ________ at lower interest rates, and _________ at higher interest rates.

A)higher, lower

B)lower, higher

C)unchanged, lower

D)higher, unchanged

14The value of any bond is equal to

A)The cash payments discounted at the forward rates.

B)The cash payments discounted at the spot rates.

C)The cash payments discounted at the duration rates.

D)The par value discounted at the spot rates.

15Duration of a pure discount bond is:

A)Equal to its half-life

B)Less than a zero coupon bond

C)Equal to its liabilities hedged

D)Equal to its maturity

4. The Value of Common Stocks

Multiple Choice Quiz(See related pages)

1Sam's Company expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two and then be sold for $136 per share. If the required rate on the stock is 20%, what is the current value of the stock?

A)$100.10

B)$105.69

C)$110.00

D)$120.29

2The constant dividend growth formula P0 = DIV1/(r-g) assumes:

A)The dividends are growing rate at a constant rate g forever.

r > g

B)

C)g is never negative.

D)Both A and B

3Dividend growth rate for a stable firm can be estimated as:

A)Plow back rate * the return on equity (ROE)

B)Plow back rate / the return on equity (ROE)

C)Plow back rate + the return on equity (ROE)

D)Plow back rate - the return on equity (ROE)

4Franks Co. is currently paying a dividend of $2.20 per share (DIV0). The dividends are expected to grow at 25% per year for the next four years and then grow 5% per year thereafter. Calculate the expected dividend in year 6.

A)$5.37

B)$2.95

C)$5.92

D)$8.39

5

The value of the stock:

A)Increases as the dividend growth rate increases

B)Increases as the required rate of return decreases

C)Increases as the required rate of return increases

D)Both A and B

6Companies with higher expected growth opportunities usually sell for:

A)Lower P/E ratio

B)Higher P/E ratio

C)A price that is independent of P/E ratio

D)A price that the dependent upon the payment ratio

7A high proportion of the value a growth stock comes from:

A)Past dividend payments

B)Past earnings

C)PVGO (Present Value of the Growth Opportunities)

Both A and B

D)

8FastGrow is a no growth firm and has two million shares outstanding. It is expected to earn a constant $20 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 10%, calculate the current price per share for the stock.

A)$200

B)$100

C)$150

D)$50

9Knight Inc. is expected to pay a $1.80 dividend next year. The dividend in year 2 is expected to be $2.10. The dividend in year 3 is expected to be $2.50. After that, the dividend is expected to grow at a constant rate of 2%. The cost of capital is 10%. What is Knight's stock price?

A)$27.02

B)$29.20

C)$31.88

D)$32.12

10K&K Corp. just paid a dividend of $2.00 (DIV0). It is expected to grow at 5% for three years. Then, it will grow at a constant rate of 2%. If the cost of capital is 8%, what is the current stock price?

A)$31.88

B)$34.60

C)$36.92

D)$39.36

11Smokes Inc. just paid a dividend of $3.00 (DIV0). Because of decreasing demand, the dividend is expected to decrease at a constant rate of 4%. The cost of capital is 11%. What is the stock price?

A)$0.00

B)$19.20

C)$20.00

D)$44.57

12You are planning to buy a share of stock. You expect next year's dividend to be $1.25 (DIV1). You plan to sell the stock at the end of year 2 for $42.50 (after receiving the year 2 dividend of $1.50). What is the maximum price you would be willing to pay for this investment if your required rate of return is 12%?

A)$30.00

B)$32.56

C)$36.19

D)$42.50

13Given a stock price of $39.77 and an expected return to shareholders of 12.4%, what is the likely growth rate if the annual dividend next year is expected to be $3.50?

A)0.0%

B)3.6%

C)8.4%

D)12.4%

14A stock is trading for $35.00 and the firm has no growth potential. An analysis reveals that the price from a new growth oriented investment would be $55.00. What is the PVGO of this new project?

A)$0.00

B)$20.00

C)$35.00

D)$55.00

15Spring Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per share. If the required rate of return on the stock is 15% and dividends are growing at a current rate of 8% per year, calculate the present value of the growth opportunity for the stock (PVGO)?

A)$57.17

B)$50.00

C)$26.66

D)$7.14

5. Net Present Value and Other Investment Criteria

Multiple Choice Quiz(See related pages)

1Which of the following investment rules does not use the time value of the money concept?

A)The payback period

B)Internal rate of return

C)Net present value

D)All of the above use the time value concept

2If the net present value of project A is +$80, and of project B is +$60, then the net present value of the combined project is:

A)+$80

B)+$60

C)+$140

D)None of the above

3You have three mutually exclusive projects: A, B, and C. They have NPVs of +$50, -$20 and +$100, respectively. What should you do?

A)Accept A

B)Accept B

C)Accept C

D)Accept A and C.

4The payback period rule accepts all projects for which the payback period is:

A)Greater than the cut-off value

B)Less than the cut-off value

C)Is positive

D)An integer

5Which of the following capital budgeting methods has the value additive property?

A)NPV

B)IRR

C)Payback period

D)Discounted payback period

6The disadvantages of the book rate of return method is/are:

A)It uses net income instead of cash flows

B)The pattern of income has no impact on the book rate of return

C)There is no clear cut decision rule

D)All of the above

7

The IRR is defined as:

A)The discount rate that makes the NPV equal to zero

B)The difference between the cost of capital and the present value of the cash flows

C)The discount rate used in the NPV method

D)The discount rate used in the discounted payback period method

8Saline Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the IRR for the project.

A)14.5%

B)18.6%

C)23.4%

D)20.2%

9Werney Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 15%.

A)$169,935

B)$292,110

$600,000

C)

D)$258,460

10Profitability index is the ratio of:

A)Present value of cash flow to initial investment

B)Net present value cash flow to initial investment

C)Net present value of cash flow to IRR

D)Present value of cash flow to IRR

11For a company with a positive NPV and an opportunity cost of capital of 9%, which of the following IRRs must be false?

A)8.50%

B)9.50%

C)10.5%

D)11.5%

12Who imposes soft rationing limits?

A)Lenders

B)Managers

C)Capital Markets

D)Regulators

13What is the IRR for a project with the following cash flows: Year 0 –5000, Year 1 +3000, Year 2 +4000?

A)10.1%

B)15.0%

C)24.3%

D)31.0%

14What is the payback period for a project with the following cash flows: Year 0 –5000, Year 1 +3000, Year 2 +4000?

A)1 year

B)2 years

C)3 years

D)4years

15A project requires an investment of $10 million and has an NPV of $16 million. What is its profitability index?

A)1.0

B)1.6

C)0.6

D)3.2

6. Making Investment Decisions with the Net Present Value Rule

Multiple Choice Quiz(See related pages)

1Preferably, cash flows for a project are estimated as:

A)Cash flows before taxes

B)Cash flows after taxes

C)Earnings before taxes

D)Earnings after taxes

2The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car except:

A)The consequent reduction in sales of the company's existing gasoline models

B)The expenditure on new plant, property, and equipment

C)New spare parts inventory

D)Interest payment on debt

3Money that a firm has already spent or committed to spend regardless of whether a project is taken is called:

A)Sunk costs

B)Opportunity costs

C)Fixed costs

D)None of the above

4A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is:

A)$100,000

B)$150,000

$250,000

C)

D)None of the above

5The real rate of interest is 3 % and the inflation is 4%. What is the nominal rate of interest?

A)3%

B)4%

C)7.12%

D)7%

6Suppose a real cash flow occurring in year 2 is 50,000. If the inflation rate is 10% per year, calculate nominal cash flow for year 2.

A)60,500

B)50,000

C)55,000

D)None of the above

7Capital equipment costing $200,000 today has salvage value of $50,000 at the end of 5 years. If straight line depreciation is used, what is the book value of the equipment at the end of year 2?

A)$200,000

B)$170,000

C)$140,000

D)$50,000

8For project A in year 2, inventories increase by $10,000 and accounts payable by $4,000. Calculate the increase or decrease in net working capital for year 2.

A)Increases by $12,000

B)Decreases by $12,000

C)Increases by $6,000

D)Decreases by $6,000

9If the depreciation amount is $100,000 and the marginal tax rate is 30%, then the tax shield due to depreciation is:

A)$333,333

B)$100,000

C)$30,000

None of the above

D)

10Two machines, A and B, which perform the same functions, have the following costs and lives.

Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 10%.

A)B because the EAC is 667

B)A because the EAC is 1,125

C)B because the EAC is 1,174

D)A because the PV of Costs is 6,000

11For NPV calculations:

A)Only cash flows are relevant

B)Always estimate cash flows on an incremental basis

C)Be consistent in the treatment of inflation

D)All of the above

12Which of the following is not included in working capital?

Cash

A)

B)Raw material and finished goods inventories

C)Plant, property, and equipment

D)Accounts payable

13A new manufacturing project uses land which could otherwise be sold. This land is an example of

A)Sunk cost

B)Opportunity cost

C)Incremental cost

D)Working capital

14In the first year of a project inventories decrease by $50,000, accounts payables decrease by$20,000 and accounts receivables increase by $30,000. What is the change in working capital?

A)$0

B)$10,000

C)$$40,000

D)$100,000

15If the depreciable investment is $500,000 and the MACRS 5-Year class schedule is: Year 1: 20% ; Year 2: 32%; Year 3: 19.2%; Year 4: 11.5%; Year 5: 11.5% and Year 6: 5.8%. Calculate the depreciation tax shield for Year 2 using a tax rate of 30%.

A)$80,000

B)$30,000

C)$48,000

D)$17,250

7. Introduction to Risk and Return

Multiple Choice Quiz(See related pages)

1Which of the following portfolios have the least risk?

A)A portfolio of treasury bills

B)A portfolio of long-term United States Government bonds

C)Standard and Poor's composite index

D)Portfolio of common stocks of small firms

2If held for possible resale, long-term government bonds have:

A)Interest rate risk

B)Default risk

C)Market risk

D)None of the above

3If the average annual rate of return for common stocks is 13%, and treasury bills is 3.8%, what is the average market risk premium?

A)13%

B)3.8%

C)9.2%

D)None of the above

4Safro Corporation has had returns of –5%, 15% and 20% for the past three years. Calculate the standard deviation of the returns. (hint: assume this is a sample of the population).

A)10.22%

B)22.91%

C)30.92%

D)13.23%

5The portion of the risk that can be eliminated by diversification is called:

A)Unique risk

B)Market risk

C)Interest rate risk

D)Default risk

6Stock A has an expected return of 10% per year and stock B has an expected return of 20%. If 55% of the funds are invested in stock B, what is the expected return on the portfolio of stock A and stock B?

A)10%

B)14.5%

C)15.5%

D)20%

7For a two-stock portfolio, the maximum reduction in risk occurs when the correlation coefficient between the two stocks is:

A)+1

B)0

C)–0.5

D)–1

8The "beta" is a measure of:

A)Unique risk

B)Market risk

C)Total risk

D)None of the above

9The variance or standard deviation is a measure of:

A)Total risk

B)Unique risk

C)Market risk

D)None of the above

10The beta of a risk-free portfolio is:

A)0

B)+0.5

C)+1.0

D)–1.0

11The variance of the market return is

A)The standard deviation.

B)The expected return.

C)The expected squared deviation from the expected return.

D)The square root of the covariance.

12What is the arithmetic average return of bonds earning 5%, stocks earning 11% and treasuries earning 2%?

A)2%

B)5%

6%

C)

D)11%

13Diversification works because?

A)Market risk is eliminated

B)Correlation coefficients

C)All of the above

D)None of the above

14Stocks with betas _______________ tend to amplify the overall movements of the market.

A)Equal to 1

B)Greater than 1

C)Less than one

D)None of the above

15The risk of a well diversified portfolio depends upon the

A)Market risk

B)Unique risk of the securities included in the portfolio

C)Number of securities in the portfolio

D)Variance of the portfolio

8. Portfolio Theory and the Capital Asset Pricing Model

Multiple Choice Quiz(See related pages)

1Investments A and B both offer an expected rate of return of 12%. If the standard deviation of A is 20% and that of B is 30%, then investors would:

A)Prefer A to B

B)Prefer B to A

C)Prefer a portfolio of A and B

D)Cannot answer without knowing investor's risk preferences

2When stocks with the same expected return are combined into a portfolio, the expected

return of the portfolio is:

A)Less than the average expected return value of the stocks

B)Greater than the average expected return of the stocks

C)Equal to the average expected return of the stocks

D)Impossible to predict

3Efficient portfolios are those that offer:

A)Highest expected return for a given level of risk

B)Highest risk for a given level of expected return

C)The maximum risk and expected return

D)All of the above

4The beta of a Treasury bill portfolio is:

A)Zero

B)+0.5

C)–1.0

+1.0

D)

5The security market line (SML) is the graph of:

A)Expected return on investment (Y-axis) vs. variance of return.

B)Expected return on investment vs. standard deviation of return.

C)Expected rate of return on investment vs. beta.

D)A and B.

6If the beta of Freon is 0.73, risk-free rate is 5.5% and the market rate of return is 13.5%, calculate the expected rate of return from Freon:

A)12.6%

B)15.6%

C)13.9%

D)11.3%

7If a stock is overpriced it will plot:

A)Above the security market line

B)On the security market line

C)Below the security market line

D)On the Y-axis

8A "factor" in APT is a variable that:

A)Affects the return of risky assets in a systematic manner

B)Correlates with risky asset returns in an unsystematic manner

C)Is purely "noise"

D)Affects the return of a risky asset in a random manner

9The drawback of the CAPM is that it:

A)Ignores the return on the market portfolio

B)Requires a single measure of systematic risk

C)Ignores the risk-free return

D)Utilizes too many factors

10If returns are normally distributed, the only two measures that an investor should consider are:

Beta and covariance

A)

B)Correlation coefficient and beta

C)Expected return and standard deviation

D)Standard deviation and beta

11The expected rate of return of Stock (X), given a beta of 1.3, risk free rate of 6%, and a market risk premium of 7%, is:

A)12.0%

B)13.3%

C)14.2%

D)15.1%

12What is the risk free rate given a beta of .8, a market risk premium of 6%, and an expected return of 9.8%?

A)3.2%

B)5.0%

C)5.2%

D)6.8%

13The capital asset pricing model states that the expected market risk premium of each investment is proportional to its:

A)Beta

B)Standard Deviation

C)Variance

D)Alpha

14The risk premium for Treasury bills is always equal to:

A)–1

B)1

C)Zero

D)The risk free rate

15The Three-Factor Model proposed by Fama and French suggests that expected returns can be determined by:

A)The return on the market index minus the risk-free rate

B)The return on small-firm stocks minus the return on large-firm stocks

C)

The return on high book-to-market-ratio stocks minus the return on low book-to-market-ratio stocks

D)All of the above

9. Risk and the Cost of Capital

Multiple Choice Quiz(See related pages)

1The term cost of capital for a project depends on:

A)The use to which the capital is put, i.e. the project

B)The company's cost of capital

C)The industry cost of capital

D)All of the above

2If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely?

A)Rejecting good low risk projects

B)Accepting poor high risk projects

C)Both A and B

Neither A nor B

D)

3Using the company cost of capital to evaluate a project is:

A)Always correct

B)Always incorrect

C)Correct for projects that are about as risky as the average of the firm's other assets

D)None of the above

4Which of the following types of projects is likely to have the lowest risk?

A)Speculation ventures

B)New products

C)Expansion of existing business

D)Cost improvement

5The hurdle rate for capital budgeting decisions is:

A)The cost of capital

B)The cost of debt

C)The cost of equity

D)All of the above

6If you graph common stock returns on the Y axis and market returns on the X-axis, the slope of the regression line is:

A)Alpha

B)Beta

C)Security market line

D)None of the above

7A company has a cost of capital of 15%. However, it is introducing a new product that it considers to be a very risky endeavor. What can you say about the appropriate discount rate for the project?

A)The rate used should be 15%

B)The rate used should be lower than 15%

C)The rate used should be greater than 15%

D)The rate used should be between 12% and 18%

8The market value of Charter Cruise Company's equity is $15 million, and the market value of

its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)

A)17%

B)20%

C)8.1%

D)None of the above

9A project has an expected risky cash flow of $1,000 in Year 1. The risk-free rate is 4%, the market rate of return is 12%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for Year 1.

A)$896.55

B)$862.07

C)$828.91

D)None of the above

10A project has an expected cash flow of $300 in year 3. The risk-free rate is 5%, the market risk premium is 8% and the project's beta is 1.25. Calculate the certainty equivalent cash flow for year 3.

A)$228.35

B)$197.25

C)$300

D)None of the above

11Which of the following type of projects has the highest risk?

A)Speculation ventures

B)New products

C)Expansion of existing business

D)Cost improvement

12Which of the following are valid ways to discount a risky cash flow, C1?

A)Discount the risky cash flow at the risk-free rate

B)

Discount the risky cash flows at a risk-adjusted discount rate that is less than the risk-free rate

C)Find the certainty-equivalent cash flow and discount it at the risk-adjusted discount rate

D)Find the certainty-equivalent cash flow and discount it at the risk-free rate

13A company cost of capital is quoted as 8%. The book value of debt and equity was used in the calculation. Which of the following adjustments to the calculation is most likely to cause an increase in the cost of capital?

A)Market value of debt is used

B)Market value of equity is used

C)Market value of debt and equity are both used

D)There will be no change

14What is the cost of capital for a firm with market value of debt of $20 million and market value of equity of $60 million, given a cost of equity at 12% and a cost of debt at 6%? Assume no taxes.

A)6%

B)8.5%

C)10.5%

D)12%

15What is the cost of capital for a firm with market value of debt of $10 million and market value of equity of $90 million, given a cost of equity at 10% and a cost of debt at 4%? Assume no taxes.

A)6.4%

B)7.4%

C)8.4%

D)9.4%