1. Zeta Inc.s cost of capital is 12% and the risk-free rate is 5%. It plans to invest in a new project. The cash flow projections ($000) for the project are given below. Calculate the difference in the traditional NPV and the certainty equivalent NPV.

Year	0	1	2	3	4
Cash Flow	-240	75	75	75	75
CE factor	1	0.9	0.85	0.8	0.75

	a.	$9.43
	b.	$30.35
	c.	$20.92
	d.	$7.59

2. If a project comes with its own funding offered at a rate lower than the cost of capital, the capital budgeting analysis should be conducted using:

	a.	the cost of capital because to do otherwise would be unfair to departments whose projects don't happen to have separate funding.
	b.	an average of the offered rate and the cost of capital because that gives the best measure of the effect of the offer on the firm.
	c.	the offered rate because it is appropriate to match sources and uses of funding whenever possible.
	d.	the cost of capital because doing otherwise leads to irrational capital budgeting decisions.

3. Projects with IRRs above the intersection of the IOS and MCC:

	a.	should be accepted.
	b.	should be rejected.
	c.	have returns greater than the cost of financing.
	d.	Both a & c

4. Which of the following statements about the marginal cost of capital (MCC) and the investment opportunity schedule (IOS) is incorrect?

	a.	A company's WACC for the planning period is at the intersection of the MCC and the IOS.
	b.	The MCC will break when low cost debt runs out and is replaced with higher cost debt.
	c.	The IOS ranks projects from highest to lowest according to their individual NPV's.
	d.	A break in the MCC may occur because of the floatation costs associated with issuing new stock.
	e.	All of the above statements are correct.

5. Which of the following is NOT true regarding the marginal cost of capital (MCC)?

	a.	Breaks when common stock is exhausted
	b.	Is a graph of the WACC
	c.	Represents the cost of the next dollar raised
	d.	Increases due to flotation costs

6. The first break in the MCC usually occurs because:

	a.	equity capital is more expensive when raised from outside sources.
	b.	debt costs more as more is raised because the firm appears riskier to investors.
	c.	it becomes impossible to sell more preferred stock.
	d.	the firm runs out of money.