1. The cost of capital for a company is based on the average of the interest rates they would pay to borrow and the adequate return on equity for shareholders. That is why we call it the weighted average cost of capital (WACC)

a. true

b. false

2. Which explains how different stocks might need to have higher expected return based on the nature of their exposure to risk

a. firm specific risk like a whaling venture that might end badly means the expected return must be higher

b. High Beta Stocks that get hit harder by macro shocks need to have a higher expected return

c. Any uncertainty about a company means the return needs to be higher

d. When we talk about the expected return on a stock we are talking about the best case scenario for firm outcomes

3.Which is accurate regarding the debate about currency manipulation by China. Free Hint this question is NOT on the Final but the correct answer is the one that starts with China did intervene ...

a. China did intervene in currency markets and demanded dollars that they used to buy US bonds. That helped make their exports cheap so US consumers bought more Chinese goods, but theymostly stopped that policy during the last decade

b. China intervened to make their Yuan much stronger in the currency market and that help them have a bigger trade surplus

c. China has been demanding US dollars to make their currency weaker every year since the late 1990s

4. What is the IRR for a potential venture where the initial investment is $10 million and you expect to get $12 million back two years later? Note that IRR corresponds to the hypothetical discount rate that would make NPV = 0. Hint you need to solve for the growth rate corresponding to 12 = 10 x (1+r)² and you can rearrange and take the square root of both sides

a. 20% or .20 in decimal form

b. 120% or 1.2 in decimal form

c. Roughly 9.5% or .095 in decimal form

d. Ten Gazillion

5. What is the NPV of a venture where you invest $100 million now and then get $65 million in one year and another $65 million in two years. Assume that the company doing it has a 6% cost of capital.

a. $30 million

b. $12 million

c. $19.17 million

d. 30%

6. What is the IRR of a venture where you invest $100 million now and then get $65 million in one year and another $65 million in two years. Assume that the company doing it has a 6% cost of capital. Does the IRR exceed that cost of capital. Note that you need to use a financial calculator or the IRR formula in Excel to get the IRR, but you should also know (for the final) that its the r that solves 100 = 65/(1+r) + 65/(1+r)²

a. Roughly 17%

b. Roughly 19.4%

c. 30%

d. Roughly 22.3%