1. The existence of a riskless security in the risk & return tradeoff

Does NOT influence investors preferences regarding which risky portfolio to hold.

Results in investors all holding different portfolios of risky assets, depending on their individual risk preferences.

Results in investors all holding the same portfolio of risky assets, which corresponds to the tangency point of the efficient portfolio frontier of risky assets and a line through the riskless asset's return.

None of the above.

2. Assume the risk free rate is 4.5% and the expected return on the market is 14%. Based on the CAPM, what should be the rate of return for security having a beta of 1.25?

11.88%

16.38

18.5

17.5

22

3. How many different portfolios could be formed with only 2 assets?

1

2

4

16

An infinite number

4. Questions address a capital budgeting problem and are related, though there are

assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error.

Consider the following for questions 4448: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value.

Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years.

Question: What is the total cost at time zero of accepting this project?

40,000

41,000

30,000

31,000

Insufficient information to answer

Questions 44-48 address a capital budgeting problem and are related, though there are assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error.

Consider the following for questions 4448: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value.

Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years.

Question: What is the depreciation each year over the machine's 4 year life?

9,000

9,250

10,000

10,250

Insufficient information to answer.

Questions 44-48 address a capital budgeting problem and are related, though there are problem and are related, though there are assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error.

Consider the following for questions 4448: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value.

Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years.

Question: Regardless of your answer to number 45 above, ASSUME DEPRECIATION = $8,000 per year. What is the project's aftertax operating cash flow during years 14 from the machine?

11,000

3,000

6,600

14,600

9,800

Questions 44-48 address a capital budgeting problem and are related, though there are assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error.

Consider the following for questions 4448: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value.

Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years.

Question: Assuming the equipment is sold for the expected $10,000 market salvage value at the end of its 4 year life, compute the after tax salvage value of the equipment.

Note: this question addresses ONLY the aftertax salvage value, i.e., the aftertax cash flow from the sale of the equipment. This question does NOT address any other terminal year cash flows.

4,000

6,000

7,600

10,000

none of the above

Questions 4448 address a capital budgeting problem and are related, though there are assumptions made in sequential questions to avoid an initial error causing all subsequent responses to be in error. Consider the following for questions 4448: A new product is being considered by Stanton Corp. An outlay of $40,000 is required for equipment and an additional net working capital investment of $1000 is required. The project is expected to have a 4 year life and the equipment will be depreciated on a straight line basis (equal annual amount) to a $4,000 book value. Producing the new product will reduce current manufacturing expenses by $5,000 annually and increase earnings (revenue) before depreciation and taxes by $6,000 annually. Stantons marginal tax rate is 40 percent. Stanton expects the equipment will have a market salvage value of $10,000 at the end of 4 years. Question: Regardless of your answer to number 46 & 47 above, ASSUME the project's aftertax operating cash flow during years 14 from the machine = $8,000 and the after tax salvage value = $7,000. What is the TOTAL cash flow expected from this project in the terminal year, including any initial investment amounts assumed to be recovered? Include all terminal year flows as well as the terminal year operating cash flow of 8,000 assumed.

7,000

8,000

15,000

16,000

none of the above

Assume the following for a project under evaluation:

The project's life is 4 years.

The total time zero, initial cost of $55,000.

The total net operating cash flow each year is $15,000.

In addition to the terminal year operating cash flow, there is a nonoperating, terminal year cash flow of $8,000.

If the cost of capital for a project of this risk is 7%, what is the project's NPV? Accept or reject the project?

123,000; accept

13,000; accept

-56,911; reject

1,911; accept

13,355; accept

Assume the following for a project under evaluation:

The project's life is 4 years.

The total time zero, initial cost of $55,000.

The total net operating cash flow each year is $15,000.

In addition to the terminal year operating cash flow, there is a nonoperating, terminal year cash flow of $8,000.

What is the project's IRR? Accept or reject the project? Again, assume the cost of capital for a project of this risk is 7%.

7%; indifferent to accept or reject

8.4%; reject

8.4%; accept

15.75%, reject

15.75%: accept