Sample Quiz 1 FIN 351

Student: ___________________________________________________________________________ 1. What is the NPV of a project that costs $100,000 and returns $50,000 annually for three years if the opportunity cost of capital is 14%? A. $3,397.57 B. $4,473.44 C. $16,085.00 D. $35,000.00 2. Which of the following changes will increase the NPV of a project? A. A decrease in the discount rate B. A decrease in the size of the cash inflows C. An increase in the initial cost of the project D. A decrease in the number of cash inflows 3. When the NPV of an investment is positive, then the IRR will be: A. equal to the opportunity cost of capital. B. greater than the opportunity cost of capital. C. less than the opportunity cost of capital. D. less than or equal to the opportunity cost of capital. 4. Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: CF0 = -6,000, CF1 = +3,300, CF2 = +3,300. A. Accept, since IRR exceeds opportunity cost. B. Reject, since opportunity cost exceeds IRR. C. Accept, since opportunity cost exceeds IRR. D. Reject, since IRR exceeds opportunity cost.

5. The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12% is: A. 1.139 B. 1.320 C. 1.500 D. 1.861

6. Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%? A. Its payback period is roughly 3 1/2 years. B. Its NPV is $2,194. C. Its IRR is 1.85%. D. Its profitability index is 1.109. 7. The NPV of an investment made today is $10,000. If postponed for one year, the NPV at that time will increase by $1,000. Which of the following is correct if the opportunity cost of the investment is 12%? A. Postpone; the NPV increases by a positive amount. B. Postpone; the NPV will be larger. C. Invest now; NPV does not grow at a sufficient rate. D. Invest now; always accept positive NPV projects. 8. Which of the following is least likely to influence the opportunity cost of an asset? A. Its current market value. B. Alternative uses for the asset. C. The current demand for the asset. D. Its current book value. 9. In what manner does depreciation expense affect investment projects? A. It reduces cash flows by the amount of the depreciation expense. B. It increases cash flows by the amount of the depreciation expense. C. It reduces taxable income by the amount of the depreciation expense. D. It reduces taxes by the amount of the depreciation expense. 10. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? A. $260,000 B. $325,000 C. $360,000 D. $425,000 11. Which of the following statements is correct concerning sensitivity analysis? A. It ignores interrelationships between variables. B. Several variables are allowed to change concurrently. C. It considers all feasible variable combinations. D. Its results are free from ambiguity. 12. What rate of return should an investor expect for a stock that has a beta of 1.25 when the market is expected to yield 14% and Treasury bills offer 6%? A. 9.2% B. 11.2% C. 12.4% D. 16.0% 13. Macro events only are reflected in the performance of the market portfolio because: A. the market portfolio has no individual firms. B. only macro events are tracked by economists. C. unique risks have been diversified away. D. firm-specific events would be too numerous to list.

14. When the overall market experiences a decline of 8%, an investor with a portfolio of aggressive stocks will probably experience: A. negative portfolio returns of less than 8%. B. negative portfolio returns of greater than 8%. C. positive portfolio returns of less than 8%. D. positive portfolio returns of greater than 8%. 15. Which of the following statements is correct when Treasury bills yield 7.5% and the market risk premium is 9.5%? A. The S&P 500 would be expected to yield about 8.50%. B. The S&P 500 would be expected to yield about 9.50%. C. The S&P 500 would be expected to yield about 12.68%. D. The S&P 500 would be expected to yield about 17.00%. 16. What is the cost of equity for Zel Mining if the company pays an expected dividend of $2.00 next year and has a payout ratio of 30 percent, a ROE of 20 percent, and a stock price of $40? A. 11% B. 14% C. 17% D. 19% 17. Investing borrowed funds in a stock portfolio will: A. increase the beta of the portfolio. B. decrease the volatility of the portfolio. C. decrease the expected return on the portfolio. D. increase the market risk premium. 18. The company cost of capital, after tax, for a firm with a 65/35 debt/equity split, 5% cost of debt, 14% cost of equity, and a 35% tax rate would be: A. 7.01% B. 8.63% C. 10.80% D. 13.80% 19. How much is added to a firm's weighted average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%? A. 1.29% B. 2.93% C. 3.50% D. 4.50% 20. Company X has 3 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 120% of par. What is its ratio of debt to value for WACC purposes? A. 21.0% B. 23.0% C. 31.0% D. 33.3%

21. What would you estimate to be the required rate of return for equity investors if a stock sells for $50 and will pay a $3.0 dividend that is expected to grow at a constant rate of 6%? A. 7.6% B. 12.0% C. 12.6% D. 16.0% 22. If a firm has three times as much equity as debt in its capital structure, then the firm has: A. 25.0% debt. B. 66.7% equity. C. 40.0% debt. D. 33.3% equity. 23. You have two proposals to choice between. The initial proposal has a cash flow that is different than the revised proposal. The initial cash flow is C0=-300, C1=350. The revised cash flow is C0=-300, C1=10, C2=10, and C3=360. The IRR for the initial project is 17% compared to 8% for the revised project. The discount rate is 3%. Which project should you select if you could only choose one? A. Initial because it has a greater IRR. B. Initial because it has a greater NPV. C. Revised because it has a greater IRR. D. Revised because it has greater NPV. 24. Freitag invests $400 million in a project. The PV is 650 million. Has 200 million shares outstanding with a current market price of $22. The investment is new information. What should be the effect of the project on the the stock price? A. $23.25. B. $33.25. C. $24.00 D. $22.00. Use the following information to answer questions 25, 26, and 27. Mac Company is considering the purchase of a new 400-ton stamping press. The press costs $500,000. The press will depreciate straightline to 0 over a ten year life. The press will generate no additional revenues, but it will reduce cash operating expenses by $150,000 annually. The press will be sold for $120,000 after nine years. An inventory investment of $100,000 is required during the life of the investment. Mac is in the 35 percent tax bracket. The cost of capital is 10%. 25. What is the initial outlay? A. $400,000. B. $450,000. C. $500,000. D. $600,000. 26. What is the annual after-tax operating cash flow? A. $114,000. B. $115,000. C. $116,000. D. $117,000.

27. What is the terminal years after-tax nonoperating cash flow at the end of year 9? A. $95,500 B. $132,000. C. $195,500. D. $220,000. 28. Tech World has determined it could issue $1000 face value bonds with an 8% coupon paid semiannually and a five-year maturity at $900 per bond. If the marginal tax rate is 38%, its after-tax cost of debt is closest to? A. 6.2% B. 6.4%. C. 6.6%. D. 6.8%. 29. The initial cash outlay is $400,000 and the project life is 4 years. Cash flow generated each year is $110,000. The cost of capital is 8%. The company can abandon the project after the first year and receive $300,000. Should they abandon? A. Abandon B. Do not abandon 30. A project currently generates sales of $10 million; variable costs equal 50% of sales. The tax rate is 35%. The annuity factor is 1.835. What is the effect of variable costs increase to 70% of sales on the NPV? A. $5.5 million decrease B. $3.67 million decrease. C. $2.38 million decrease. D. $1.5 million decrease. 31. The cost of debt can be determined using the yield-to-maturity and the bond rating approaches. If the bond rating approach is used, the A. Coupon is the yield. B. Yield is based on the interest coverage ratio. C. Company is rated and the rating can be used to assess the yield on the companys debt. D. After-tax cost of the debt is not known. 32. Morgan Insurance issued preferred stock at $24 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5%. The stocks current value is? A. $25.00 B. $26.92 C. $37.31 D. $40.18 33. The cost of equity is equal to the A. Expected market return. B. Rate of return required by stockholders. C. Cost of retained earnings plus dividends. D. Risk the company incurs when financing.

34. We want to evaluate a project that will be financed with debt and equity in a ratio of .50 and a tax rate of 35%. We find a comparable company that has a tax rate of 35%, beta of 1.2 and debt to equity of .20. What is the beta for the project? A. 1.30. B. 1.20. C. 1.40 D. 1.50. 35. If the beta of a stock is negative what is the expected return of the stock according the CAPM? A. It is greater than the market return. B. Beta cannot equal zero. C. The expected return will be less than the Treasury bill rate. D. The expected return will be zero. 36. True or False. If the standard deviation of a stock A is greater than stock B, than the beta of Stock A is greater than the beta of stock B. A. True B. False 37. A share of stock with a beta of .75 and sells for $50. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4%, and the market risk premium is 7%. If the stock is perceived to be fairly priced today, what must be investors expectation of the price of the stock at the end of the year? A. $49.00. B. $49.62. C. $50.00. D. $52.62. 38. The book value for Frontier Corp is currently $50 and forecasted for next year to be $50. The market value of debt is currently $62 and forecasted to be $63 next year. The book value of shareholders equity is currently $55 and forecasted to be $58 next year. The market value of shareholders equity is currently $210 and forecasted for next year to be $220. What are the weights that Fronteir should use to estimate the cost of capital for debt and equity. A. wd=0.200; we=0.800. B. wd=0.185; we=0.815. C. wd=0.223; we=0.777. D. wd=0.228; we=0.772. 39. As debt is added to the capital structure, the: A. WACC will continually decline. B. WACC will continually increase. C. cost of debt can be expected to rise. D. WACC will be unaffected.

Answers

1. C 2. A 3. B 4. B 5. A 6. A 7. C 8. D 9. C 10. D 11. A 12. D 13. C 14. B 15. D 16. D 17. A 18. A 19. B 20. A 21. B 22. A 23. D 24. A 25. D 26. B 27. C 28. C 29. A 30. C 31. C 32. B 33. B 34. C 35. C 36. B 37. D 38. C 39. C