QUESTION 3

A company is considering two mutually exclusive projects, the companys required return is 8 percent and they do not have any capital constraints. Based on the profitability index, what is your recommendation concerning these projects?

Project A Project B

Year Cash Flow Year Cash Flow

0 -$38,500 0 -$42,000

1 $20,000 1 $10,000

2 $24,000 2 $40,000

		You should only accept project B since it has the largest PI and the PI exceeds 1.
		You should accept both projects since both of their PIs are positive.
		You should accept project A since it has the higher PI.
		You should accept both projects since both of their PIs are greater than 1.
		Neither project is acceptable.

QUESTION 7

1. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

   		The bonds coupon rate is less than 8%
   		The bonds coupon rate is more than 8%
   		The bonds coupon rate is equal to 8%
   		The bonds current yield is less than 8%.
   		The bonds current yield is equal to 8%

QUESTION 8

1. The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of

   		The existence of taxes.
   		Investors' unwillingness to purchase additional shares of common stock.
   		The existence of greed.
   		The existence of financial leverage.
   		The existence of flotation costs.

QUESTION 9

You want to deposit an equal amount of money every year at the end of each of the next 30 years into an account that pays 7.5% annually compounded interest, in order to be able to retire comfortably. During your retirement years, you want to have the ability to withdraw at the end of each of the 15 years, the amount of $32,000. During your retirement years, you will keep your money in an account that earns 3% annually compounded interest. What should be your annual deposits during your working years?

1. 		3,694.55
   		4,836.65
   		5,273.85
   		4,422.74
   		5,894.27

QUESTION 10

If a stock's dividend is expected to grow at a constant rate of 6% a year, which of the following statements is CORRECT?

		The stock's dividend yield is 6%.
		The expected return on the stock is 6% a year.
		The stock's required return must be equal to or less than 6%.
		The price of the stock is expected to decline in the future.
		The stock's price one year from now is expected to be 6% above the current price.