1)The IRS is reevaluating the asset life categories used for ACRS depreciation. The trucks that JK Industries use are currently classified by the IRS as having an asset life of 7 years. Because these trucks actually last for 10 years, the firm's managers would prefer the IRS to reclassify them as 10-year assets so the firm can keep them longer, spread the cost of depreciation over more years and hence increase earnings.(True, False, Uncertain and explain your response)

2)Payback is not an effective way to cope with risk. (True, False, Uncertain and explain your response)

3)To reduce agency problems, both monitoring and incentive alignment methods rely on the threat of punishment.(True, False, Uncertain and explain your response)4

4)Assume that all you have available are data for the following ratios and your firm and your industry.

Total Asset Turnover= Revenues/AssetsTotal Margin= EBIT/RevenuesNet Profit Margin= Earnings/RevenuesTimes Interest Earned= EBIT/InterestReturn on Equity= Earnings/Equity

If you want evaluate the effectiveness of your company's operating managers and you can only use one of the measures, which one should it be and why?55

5)An undiversified portfolio with a beta of 2.0 is less than twice as risky as the market portfolio. (True, False, Uncertain and explain your response)

6)Rau Inc. has 7.0 percent coupon bonds on the market with 9 years to maturity.The bonds make semi-annual payments and currently sell for 80 percent of par.What is the YTM?You will upload an Excel spreadsheet that shows all of your work and the solution.

7)JJ Enterprises is considering the purchase of a new machine that will produce thumb drives.The new machine will require an initial investment of $800,000 and has an economic life of five years and will be fully depreciated by the straight line method.The machine will produce 150,000 thumb drives per year with each costing $0.10 to make.Each will be sold at $2.00.Assume JJ Enterprises uses a discount rate of 14 percent and has a tax rate of 34 percent. What is the NPV of the project and should JJ Enterprises make the purchase.

You will upload an Excel spreadsheet that shows all of your work and the solution.

8)You are building a pipeline which will generate its first annual cash flow of $2m exactly 5 years from today. As it ages, the volume it transports, and hence the cash flows it creates, will decline by 3% per year. Exactly 27 years from today, this pipeline will be scrapped, and the Environmental Protection Agency will require you to spend $50m then to dismantle it. The pipeline's OCC is 9%. What's the lowest price that you would consider selling it for?

9)Choosing One Portfolio. The following table shows your predictions of the future returns on three mutual funds. Treasury Bills currently earn 4%. To invest all your wealth, you are limited to choosing a portfolio of only one of these three funds along with T-Bills. You are risk averse and able to borrow and short-sell. Which one of the three risky funds do you choose to invest in. Simple calculations or a graph may be helpful to illustrate your choices.

Compare Fund A to Fund B. Which do you prefer? Explain.

T-Bills Fund A Fund B Fund C

E[rp]4%16%16%10%

25%20%12

p.901.000.60

You will upload a Word Document that shows all of your work and the solution.1

10)You are considering buying a bond issued by General Motors with exactly 5.5 years remaining to maturity that just paid a coupon yesterday. It rained on your paper this morning so you do not know what the coupon rate is. However you are able to see that the quoted price is listed as $105-20 and the annualized yield is 7%, with semi-annual compounding. If the coupon is paid semi-annually, what is the quoted annualized coupon rate? Show your work.

You will upload a Word Document that shows all of your work and the solution.