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QUESTION 30 Cassie Corp. has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely

QUESTION 30

Cassie Corp. has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Cassie evaluates low-risk projects with a discount rate of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Project

Risk Level

Rate of Return

A

High

15%

B

Average

12%

C

High

11%

D

Low

9%

E

Low

6%

Which set of projects would maximize shareholder wealth?

A and B

A, B, and C

A, B, and D

A, B, C, and D

A, B, C, D, and E

QUESTION 31

Van Auken Inc. is considering a project that has the following cash flows:

Year

Cash Flow

0

-$1,000

1

400

2

300

3

500

4

400

The companys WACC is 10%. What are the projects payback, internal rate of return, and net present value?

Payback = 2.4, IRR = 21.22%, NPV = $260

Payback = 2.6, IRR = 24.12%, NPV = $300

Payback = 2.6, IRR = 21.22%, NPV = $300

Payback = 2.6, IRR = 21.22%, NPV = $260

QUESTION 32

You own a call option. The underlying common stock is selling for $15 and the options exercise price is $12. This option:

must be sold to the call writer.

is out-of-the-money.

must be bought by the call holder.

is in-the-money.

QUESTION 33

The Federal Reserve recently shifted its monetary policy, causing Lasik Vision's WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change?

New WACC:

7.00%

Old WACC:

10.00%

Year:

0

1

2

3

Cash flows:

-$1,000

$500

$520

$540

$72.27

$79.68

$83.66

$87.85

QUESTION 34

Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds.

True

False

QUESTION 35

Real options are most valuable when the underlying source of risk is very low.

True

False

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