When making investment decisions, what measurement tells you the compensation needed to assume a given level of risk?

• a.)
• Cost of debt
• b.)
• Required rate of return
• c.)
• Net present value
• d.)
• Weighted average cost of capital

Using the following variables, calculate an organization's cost of common equity.

• Rf: 2%
• s: 1.2
• (Rm- Rf): 6%
• a.)
• 7.9%
• b.)
• 8.7%
• c.)
• 9.2%
• d.)
• 7.2%

The capital asset pricing model is useful for __________.

• a.)
• determining the net present value of an organization
• b.)
• making decisions about which potential future projects to pursue
• c.)
• estimating the value of an equity using the bond yield
• d.)
• determining whether an asset's expected return will offset its susceptibility to market risk

One reason a company may choose to issue additional debt instead of equity when raising capital is that __________.

• a.)
• it decreases the risk that the company will default on its obligations
• b.)
• there are tax advantages to debt
• c.)
• debt always has a lower cost of capital
• d.)
• too much equity can increase a company's interest rate

What happens after a company files for Chapter 7 bankruptcy?

• a.)
• Creditors are paid through the sale of assets.
• b.)
• Creditors vote on the business's reorganization plan.
• c.)
• The business has an opportunity to restructure its debts.
• d.)
• Creditors may begin collections actions.

You own a small manufacturing business that produces widgets. You have spent $400,000 acquiring the fixed assets you need to produce widgets. Each widget costs you $3 to make and they sell for $25 each, so your variable cost is 12% of the overall revenue.

At your current level of operating leverage, how many widgets must you sell to break even?

• a.)
• 48,000
• b.)
• 18,182
• c.)
• 22,451
• d.)
• 16,000

Calculate a company's total leverage given the following information:

• Net income = $40,000
• Revenue = $60,000
• Variable costs = $10,000
• a.)
• Cannot calculate without EPS data
• b.)
• Cannot calculate without EBIT data
• c.)
• 1.25
• d.)
• 2

Theoretically, a company would dispense with plans for a long-term project whose net present value __________.

• a.)
• is less than one
• b.)
• is greater than one
• c.)
• falls below zero
• d.)
• is zero or greater

A company is considering investing $200,000 in a project with the following anticipated net cash flows:

• Year 1: $65,000
• Year 2: $50,000
• Year 3: $55,000
• Year 4: $35,000
• Year 5: $40,000
• Year 6: $50,000

In what year will payback occur?

• a.)
• Year 3
• b.)
• Year 6
• c.)
• Year 4
• d.)
• Year 5

Select one advantage of IRR as a capital budget method.

• a.)
• It is relatively simple and easily comprehensible.
• b.)
• It is useful for comparing projects with different lifespans.
• c.)
• It generates more accurate cash flow estimates.
• d.)
• It tells a company how long it will take to recover their investment.

What is one advantage of NPV as a capital budget method?

• a.)
• It is a useful tool for comparing multiple investment options regardless of the duration of each.
• b.)
• Most companies can rely on NPV analysis alone when making investment choices.
• c.)
• It is reliable because all NPV calculations use the same discount rate.
• d.)
• It is more useful than IRR analysis when evaluating the efficiency of an investment.