Q1 Question 1

24 Points

For each of the following statements clearly indicate whether the statement is true or false. Provide a brief explanation to justify your answer. Your answer must begin with True or False followed by your explanation. Note that your explanation cannot just be a restatement of the question statement.

Q1.1 Question 1.1

4 Points

A project will have multiple internal rates of return if its future net cash flows alternate between negative and positive values. (Your answer must begin with True or False followed by your explanation.)

Q1.2 Question 1.2

4 Points

In the net present value method, market research costs incurred in the past should be included in the net cash flows as they are directly related to the feasibility of the project. (Your answer must begin with True or False followed by your explanation.)

Q1.3 Question 1.3

4 Points

Assume that the riskfree rate of return is 5% p.a. and that an investment project costs $150,000 and is expected to generate a risky net cash flow next year of $180,000. The project is acceptable as its internal rate of return exceeds the riskfree rate of return. (Your answer must begin with True or False followed by your explanation.)

Q1.4 Question 1.4

4 Points

Buying a call option on shares is similar to selling a put option on those shares as both situations involve purchasing the underlying shares. (Your answer must begin with True or False followed by your explanation.)

Q1.5 Question 1.5

4 Points

An all-equity financed firm will not have any financial risk. (Your answer must begin with True or False followed by your explanation.)

Q1.6 Question 1.6

4 Points

In perfect capital markets, with no taxes or other market imperfections, investors will be indifferent between the firm distributing funds via dividends or share repurchases. (Your answer must begin with True or False followed by your explanation.)