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When estimating the terminal CF, a loss on disposal is when the selling price of the asset is ________ the book value. a. greater than

When estimating the terminal CF, a loss on disposal is when the selling price of the asset is ________ the book value.

a.

greater than

b.

less than or equal to

c.

equal to

d.

less than

Which of the following statements is FALSE?

a.

When evaluating a capital budgeting decision, we generally include interest expense.

b.

Many projects use a resource that the company already owns.

c.

As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

d.

Only include as incremental expenses in your capital budgeting analysis; therefore, do not include overhead expenses.

Choco Inc. has a 6% APR coupon bond that matures in 13 years. The bond pays interest semiannually. If the price is $600, the YTM (annualized) is closest to what value?

a.

$6.0%

b.

$6.5%

c.

$7.0%

d.

$13%

e.

$12%

Your firm offers a 40-year, zero coupon bond. The yield to maturity is 6.2% APR, compounded annually. What is the current market price of a $1,000 face value bond?

a.

$100

b.

$120

c.

$90

d.

$110

Which of the following statements is FALSE?

a.

The IRR investment rule states you should accept any investment opportunity where the opportunity cost of capital is less than the IRR.

b.

There are situations in which multiple IRRs exist.

c.

Since the IRR rule is based upon the rate at which the NPV equals zero, unlike the NPV decision rule, the IRR decision rule will not always identify the correct investment decisions.

d.

The IRR investment rule states that you should turn down any investment opportunity where the IRR exceeds the opportunity cost of capital.

When a depreciable asset is sold, a tax gain or tax loss on disposal is calculated. If a ________ has occurred, ________ are incurred.

a.

gain, tax reductions

b.

loss, taxes

c.

loss, taxes credits

d.

gain, taxes

If the coupon rate is greater than the YTM, a bond will sell at a ____, and decreases in market interest rates will ____.

a.

discount; increase this discount

b.

premium; decrease this premium

c.

premium; increase this premium

d.

discount; decrease this discount

Which of the following statements is FALSE?

a.

Multiple IRRs might exist when using the IRR rule.

b.

The IRR rule accounts for the riskiness of the project.

c.

The IRR rule does not give you the rate of return of a project.

d.

Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns.

A project will produce cash inflows of $1,750 a year for four years. The project initially costs $7,164. The project will close 4 years from today, and as a result should produce an additional cash inflow of $1,500 from the sale of equipment. The net present value of this project is closest to what value if the required rate of return is 16%?

a.

-$5,474.76

b.

$95.56

c.

$5,474.76

d.

$1,011.40

e.

-$1,306.18

Rejecting positive NPV projects does not benefit the stockholders because:

a.

the present value of the expected cash flows are greater than the cost.

b.

it is the most easily calculated.

c.

the present value of the expected cash flows are equal to the cost.

d.

it is the most easily understood valuation process.

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