. If I wanted to measure the systematic risk of an asset, I would calculate its .......... As opposed to this, if I wanted to measure the absolute risk (total risk) of an asset I would calculate its ..................... (Points : 3)

beta, standard deviation standard deviation, beta expected return, CV beta, expected return

If the expected dividend on a stock in the coming year is $2.50 (d1), and its constant growth rate is 5%, what would be the cost of internal equity for this firm if the current market price of its stock is $25? You can assume that the company uses the constant growth rate model.

Michaelangelo, Inc., an art firm has debt of $40,000 (market value). The cost of debt for the firm before-tax is 18.33%. The tax rate for the firm is 40%. If the firm also has equity of $60,000 (market value) whose cost is 17%, what would be the firm's cost of capital assuming that the firm uses only these two sources of financing? (Points : 3)

12.93% 14.6% 16.39% 17%

8. Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased. (Points : 3)

$252,000 $228,000 $260,000 $248,000

If I have an initial outlay of $560 on a project and it has cash inflows of $290 per year for three years, would I invest in the project if I had a cost of capital of 13.6%. Assume I use the Internal rate of return method. (Points : 3)

Yes, I would. Calculated IRR exceeds 13.6%. No, I would not. Calculated IRR is lower than cost of capital. The project would not add to the company and therefore I would not invest in it. IRR is not the method but based strictly on payback I would be forced to refuse this project.

If I had a net investment of $40,000 with cash inflows amounting to $20,000 per year for three years (years 1-3) what would be the discounted payback on the project if the cost of capital is 10%? If I had a cutoff of two years in discounted payback, would I accept this project? (Points : 3)

1.35 years; accept 1.95 years; reject 2.35 years; reject exactly 3 years; reject

14. Project OBOL has an inital outlay (NINV and the only cash outlflow) of $2000. If you are given the information that the NPV of the project is 234.96, what would be the Profitability Index for the project ? (Points : 3)

1.11 1.51 1.89 0.89

15. Affirm Timer Zeta, Inc., a pharmacutical firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be ____ the marginal cost of capital for amounts over $700 million. (Points : 3)

less than equal to greater than cannot be determined from the information given

16. What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $32,000? (Points : 3)

17.08% 16.7% 15.7% 16.3%

17. An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent). (Points : 3)

12.0% 12.6% 3.6% 12.38%

18. Enjam Loving, Inc., is considering two mutually exclusive projects. Project A and Project B both have an initial outlay of $500. The cash flows from project A (in dollars) are: 100 in year 1, 200 in year 2, 300 in year 3 and 400 in year 4. Project B pays 400 dollars in year 1, 300 dollars in year 2, 200 dollars in year 3 and 100 dollars in year 4. Loving uses both NPV and Simple payback period criterion for decision making. Assuming a cost of capital of 6%, which project would the company choose? (Points : 3)

A B B since A's NPV is higher A since B's PBP is lower Neither A nor B

19. A ten year bond has a $1,000 face value and was issued 5 years ago. The bond which matures in 5 years has a 7% annual coupon rate (paid semi-annually in two payments of $35 each). The bond currently sells for $1042.65. What is the after tax cost of debt for this bond if the tax rate for the company is 40%? (Points : 3)

About 1.8% About 1.2% 6% 7% 3.6%

20. The stock price of Webliography Inc., a web search engine company is currently $34.25 and the current quarterly dividend is $0.25. Consensus estimates for Webliography indicate a growth rate in earnings of 10% into the foreseeable future. If Webliography plans to sell 1 million shares to raise new capital for expansion, what is the cost of new equity if the issuance costs are 8%? (Hint: You need to calculate annual dividend from the quarterly dividend and use that as D0) (Points : 3)

13.49% 10.87% 13.21% 13.17%

21. If a project has an inital outlay of $560 and cash inflows of $240 per year for three years, what would be its MIRR? Assume a cost of capital of 12%. Would you accept this project? (Points : 3)

12%; No 11.79%; No 13.09%, yes 15.3%, no

22. The risk-adjusted discount rate approach is preferable to the weighted cost of capital approach when (Points : 3)

all projects have the same risk characteristics the risk-free rate is known with certainty the projects under consideration have different risk characteristics the firm is unlevered

23. Assuming that all other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ expected profitability or rate of return on the total assets of the firm. (Points : 3)

large, higher small, higher constant, higher constant, lower

24. Project Harness has an outlay of $300,000 and cash inflows of -$50,000 in year 1, $100,000 in year 2, $100,000 in year 3, $400,000 in year 4 and $300,000 in year 5. If the cost of capital for Harness is 15%, what is the NPV for the project. (Points : 3)

over $300,000 over $200,000 but under $300,000 approximately $118,567 under $100,000