1. All of the following are advantages of NPV except:
   1. it can be used as a rough, screening device to eliminate those projects whose returns do not materialise until later years.
   2. it allows the comparison of benefits and costs in a logical manner.
   3. all positive NPVs will increase the value of the firm.
   4. it recognises the timing of the benefits resulting from the project.

2. If you put $1,500 in a savings account at the end of each year for 10 years and then allow the account to compound for an additional 15 years, how much will be in the account at the end of the 25th year? Assume that the account earns 12% per annum and round to the nearest $100.
   1. $212,500
   2. $81,800
   3. $144,100
   4. $25,500

3. The ordinary shares of Mumford Quilt Company have a beta of 0.9. If the expected risk-free return is 3.5 percent and the market offers a premium of 9.5 percent over the risk-free rate, using the CAPM what is the expected return on Mumford Quilts' ordinary shares?
   1. 12.05%
   2. 7.6%
   3. 13.4%
   4. 15.4%

4. In selecting the financing weights for a firms cost of capital, although using the firm's actual financing structure is theoretically the best approach, doing so may not be appropriate if:
   1. the firm's mix of debt and equity changes.
   2. the return that debt and equity investors require changes.
   3. management alters the funding proportions when funding new projects.
   4. all of the above.

5. An investor's required rate of return is equal to:
   1. the risk premium the investor feels is necessary to compensate for the riskiness of the asset.
   2. the risk-free rate of interest plus a risk premium.
   3. the risk-free rate of interest.
   4. the risk-free rate of interest plus an inflation premium.

6. Farmers Co. just paid a dividend of $0.35 on its ordinary shares. Due to the release of an exciting new product, this company's dividends are expected to grow at a constant rate of 4 percent per annum indefinitely. If shareholders require a rate of return of 10 percent, what is the current value of each share?
   1. $11.80
   2. $25.09
   3. $6.07
   4. $5.63

7. In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find the component cost of which type of capital?
   1. Internal equity.
   2. Debt.
   3. Preference shares.
   4. All of these.

8. The firm should accept a project if:
   1. the profitability index is greater than or equal to 1.
   2. the payback period is less than the life of the investment.
   3. the internal rate of return is positive.
   4. the internal rate of return is greater than the accounting rate of return.

9. Which of the following is not a characteristic of an efficient market?

1. Investors can frequently make profits by predicting asset market prices that are different from intrinsic values.
2. The market value of all securities at any one instant in time fully reflects all available information.
3. Investors act rationally.
4. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.

10. The internal rate of return is:
    1. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
    2. the discount rate that makes NPV negative and the PI greater than one.
    3. the rate of return that makes the NPV positive.
    4. the discount rate that makes the NPV positive.

11. Phoney Communications Ltd pays income as franked dividends usable by Australian resident shareholders. The company is considering the purchase of a new telecommunications tower to replace an existing one. The new tower would be used to improve mobile phone coverage but with technological advances happening so quickly, Phoney expects that in four years time the tower will be redundant. Expected sale value on the tower is $200,000. The new machine costs $1,000,000. As the tower will be placed in a native bushland area, removal of the tower must be followed by re-establishment of foliage, which will cost approximately $2,000. Compute the terminal cash flow for this capital budgeting analysis.
    1. $202,000
    2. $198,000
    3. $802,000
    4. $798,000

12. If a company developing a fast-food outlet had $20,000 worth of surplus equipment that could have been sold if the outlet had not gone ahead, this would be considered as:
    1. an opportunity cost of proceeding with the project and therefore included in any project evaluation.
    2. totally unrelated to any project evaluation.
    3. a sunk cost to the project and therefore not included in any project evaluation.
    4. a revenue-generating benefit to the firm and therefore included in any project evaluation.

13. If there is a 20 percent chance we will get a 16 percent return, a 30 percent chance of getting a 14 percent return, a 40 percent chance of getting a 12 percent return, and a 10 percent chance of getting an 8 percent return, what is the expected rate of return?
    1. 13%
    2. 12%
    3. 15%
    4. 14%

14. Generally working capital requirements are tied up over the life of the project. This then often results in:
    1. working capital expenditures being depreciated over the life of the project.
    2. working capital being recovered on the termination of the project.
    3. the disregard of any working capital requirements in project evaluation.
    4. working capital expenditures being evenly spread over the life of the project.

15. Your company is considering a project with the following cash flows:

Initial Outlay = $1,748.80

Cash Flows at the end of Year 1-6 = $500 per annum

Compute the internal rate of return on the project.

1. 9%
2. 24%
3. 18%
4. 11%