1) The Bombay Bakery is considering the purchase of a new computer system for inventory control purposes. It is thought that better inventory management will save the firm $20,000 a year in cash expenses although it is not expected to have any effect on revenues. It is also expected that the Bakery will be able to reduce its investment in inventory by $5,000 a year. No other networking capital accounts are expected to be affected. The system will cost $80,000 and will be depreciated using straight-line depreciation over 5 years for tax purposes. The firm pays taxes at a marginal rate of 25%. What are the annual incremental cash flows for this project?

Question options:

$14,000

$19,000

$24,000

None of the above answers is correct.

2) The Evergreen Furniture Company reported an operating profit of $100,000 in 2019. Its depreciation expense was $20,000, and it invested $30,000 in new equipment during the year. Also, its accounts receivable decreased by $3,000; its inventory decreased by $10,000; its accounts payable increased by $6,000, and its taxes payable decreased by $5,000. If the firm paid taxes of $10,000 in 2019, what was its free cash flow?

Question options:

	$66,000
	$86,000
	$26,000
	$94,000

3)

In November 1989, interest rates on long-term government and corporate bonds were as follows: T bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18% The differences in rates among these issues are caused primarily by:

Question options:

Tax effects

Default risk differences

Maturity risk differences

Inflation differences

Both B and D

4)

Which of the following statements is most correct?

Question options:

The nominal rate of interest is defined as the sum of the nominal risk-free rate of return and the expected inflation rate.

If the Federal Reserve tightens the money supply, short-term interest rates will increase, and short-term rates will probably rise more than long-term rates.

Long-term interest rates reflect expectations about future inflation. Inflation has varied significantly from year to year during the last 10 years, and as a result, long-term rates have fluctuated more than short-term rates.

All of the above statements are correct

All of the above statements are incorrect

5)

Given the following data, find the expected rate of inflation during the next year:

• K = real risk-free rate = 3%
• The maturity risk premium on 10-year T-bonds = 2%
• The maturity risk premium is zero on 1-year bonds, and a linear relationship exists.
• Default risk premium on 10-year, A-rated bonds = 1.5%
• Liquidity premium = 0%
• Going interest rate on 1-year T-Bonds = 8.5%

Question options:

	3.5%
	4.5%
	5.5%
	6.5%
	7.%%