1. Which of the following is an example (or are examples) of a sunk cost in a capital budgeting analysis? (read all alternatives prior to answering)

The amount paid for a building you currently own and intend to utilize for a project

The current market value of a building you own and intend to utilize for a project

the increase in inventory required to begin a new project

the price of a consultant's report that has not yet been paid, but will be paid regardless of whether the project is accepted or rejected

both a and d are examples of sunk costs

2. You are considering the purchase of an investment that would pay your $5,000 per year for Years 15, $3,000 per year for Years 68, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then what is the most that you would be willing to pay for this investment?

$15,819.27

$21,937.26

$32,415.85

$38,000.00

$52,815.71

3. When evaluating whether to proceed with a project, the firm should consider all of the following factors except which one? (i.e., Which is a "not relevant" versus "relevant" cash flow?)

Changes in working capital attributable to the project

Previous expenditures associated with a market test to determine the feasibility of the project.

The current market value of any equipment to be sold and replaced.

The resulting difference in depreciation if the project involves a replacement decision.

All of the above should be considered.

4. While doing a capital budgeting analysis you realized that the project would require an increase in inventory of $8,000. You should

ignore the inventory requirement because it is not an operating cash flow.

record the $8,000 at time zero as an additional benefit of taking the project.

remember to depreciate the $8,000 over the depreciable life of the project.

record the $8,000 at time zero as an additional cost of taking the project.

none of the above are accurate.

5. A stock repurchase may be a signal that

A firm's stock is overvalued.

A firm's stock is undervalued

A firm is short on funds.

A firm's bonds are overvalued.

none of the above are accurate.

6. A primary advantage associated with holding a diversified portfolio of financial assets is the reduction of risk. The relevant (aka important) risk a particular stock would contribute to a well diversified portfolio is the stock's:

Total risk, as measured by the stock's beta.

nondiversifiable, aka market risk, as measured by the stock's beta.

nondiversifiable, aka market risk, as measured by the stock's standard deviation.

unique risk, as measured by the stock's standard deviation.

unique risk, as measured by the stock's beta.

7. Which of the following would tend to make a financial market more efficient?

Increase in taxes

Increase in asymmetrical information

Decrease in asymmetrical information

Higher transaction costs

Fewer competitors (participants)

8. The pecking order view of capital structure suggests that for financing new projects, firms prefer

Borrowing (debt) over issuing more equity.

Internally generated funds over borrowing.

Equity over debt.

Paying out all of the firm's earnings as dividends to existing shareholders to maximize shareholders' wealth.

Both a & b.

9. Efficient portfolios all have

no risk

equal risk

the highest return for a given risk

the lowest risk for a given return

both c & d

10. Consider the following information for the BU Scholarship Investment Fund. The total investment in the fund is $1 million.

STOCK INVESTMENT BETA EXPECTED RETURN

A $200,000 1.5 25%

B $300,000 0.5 4%

C $500,000 1.25 15%

Based on the allocation of dollars among the three stocks and their expected return, calculate the expected rate of return for the BU Scholarship Investment Fund.

14.67%

18.8

13.7

44.0

Insufficient information to compute