1. Which of the following statements about investment decision rules is correct?

a.One should accept a project if the IRR is higher than the cost of capital, regardless of whether it is an investment project or not.

b.The payback period rule gives too much weight to cash flows that occur after the cutoff date.

c.The net present value rule cannot be used to rank mutually exclusive projects.

d.The profitability index rule is most useful when managers need to allocate a limited amount of capital amongst potential projects.

e.The discounted payback rule calculates the payback period and then divides it by the discount rate.

2 Which one of the following statements about IPOs is true?

a.The offering price is usually higher than the closing price on the first trading day.

b.In a firm commitment underwriting, the underwriter buys the entire issue for less than the offering price and takes the risk of not being able to sell all the shares offered.

c.The price at which offered securities are sold in a Dutch auction underwriting is determined by the underwriter.

d.In a best efforts underwriting, the underwriter buys the entire issue from the issuing firm at the offering price.

e.None of the above.

3 Other things equal, which of the following characteristics are likely to be associated with ahighcost of equity capital?

a.Low operating leverage

b.Low financial leverage

c.Revenues move positively with the business cycle(i.e.,revenuesincrease when the economy expands and decrease when the economyweakens)

d.Costs move positively with the business cycle(i.e.,costsincrease when the economy expands and decrease when the economyweakens)

e.None of the above

4 Suppose CAPM holds, which of the following statements isincorrect?

a.Securities with higher betas must offer investors a higher expected return.

b.All securities and portfolios of securities should lie on the Security Market Line.

c.A security that has a correlation of zero with the market portfolio should earn an expected return equal to the risk-free rate.

d.Investors should not be compensated for bearing diversifiable risk.

e.If two securities have the same betas but different standard deviations, the one with a higher standard deviation should offer a higher expected return.

5 If firms use the company cost of capital for evaluating all of their projects, which of the following is likely?

1. Accepting low risk projects with negative NPVs.
2. Rejecting high risk projects with positive NPVs.
3. Accepting high risk projects with negative NPVs.
4. Rejecting low risk projects with positiveNPVs.

a.II and IV only

b.III and IVonly

c.I and III only

d.I, II, III, and IV

e.I and II only

6 Which of the following statements about the efficient market hypothesis is correct?

a.If a market is semi-strong form efficient, it must be strong-form efficient.

b.If the capital markets are efficient, then the sale or purchase of any security at the prevailing market price is generally a zero NPV transaction.

c.If the markets are semi-form efficient, then prices will adjust immediately to all information including private information.

d.Fundamental analysis is of no use if the markets are weak-form efficient.

e.Researchers have used event studies to test the efficient market hypothesis in the weak form.