28) We compute the profitability index of a capital-budgetingproposal by:
A.
dividing the present value of the annual after-tax cash flows bythe cost of capital.
B.
dividing the present value of the annual after-tax cash flows bythe cost of the project.
C.
multiplying the IRR by the cost of capital.
D.
multiplying the cash inflow by the IRR.
29) Dieyard Battery Recyclers is considering a project with thefollowing cash flows: Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of thisproject.
A.
-$466
B.
$27,534
C.
$4,000
D.
$8,891
30) Compute the payback period for a project with the followingcash flows, if the company’s discount rate is 12%. Initial outlay =$450
Cash flows: Year 1 = $325
Year 2 = $65
Year 3 = $100
A.
3.17 years
B.
2.88 years
C.
3.43 years
D.
2.6 years
31) Many firms today continue to use the payback method but employthe NPV or IRR methods as secondary decision methods of control forrisk.
A.
True
B.
False
32) Most firms use the payback period as a secondarycapital-budgeting technique, which, in a sense, allows them tocontrol for risk.
A.
True
B.
False
33) You have been asked to analyze a capital investment proposal.The project’s cost is $2,775,000. Cash inflows are projected to be$925,000 in Year 1; $1,000,000 in Year 2; $1,000,000 in Year 3;$1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that yourfirm discounts capital projects at 15.5%. What is the project’sMIRR?
A.
10.44%
B.
16.73%
C.
12.62%
D.
19.99%
34) The firm should accept independent projects if:
A.
the profitability index is greater than 1.0.
B.
the IRR is positive.
C.
the payback is less than the IRR.
D.
the NPV is greater than the discounted payback.
35) The NPV assumes cash flows are reinvested at the:
A.
NPV.
B.
real rate of return.
C.
IRR.
D.
cost of capital.
36) ABC Service can purchase a new assembler for $15,052 that willprovide an annual net cash flow of $6,000 per year for five years.Calculate the NPV of the assembler if the required rate of returnis 12%. (Round your answer to the nearest $1.)
A.
$4,568
B.
$7,621
C.
$1,056
D.
$6,577
37) PepsiCo uses 30-year Treasury bonds to measure the risk-freerate because:
A.
these bonds are essentially free of business risk.
B.
they capture the long-term inflation expectations of investorsassociated with investments in long-term assets.
C.
these bonds are essentially free of interest rate risk.
D.
none of the above.
38) The most expensive source of capital is:
A.
new common stock.
B.
debt.
C.
preferred stock.
D.
retained earnings.
39) The average cost associated with each additional dollar offinancing for investment projects is:
A.
the marginal cost of capital.
B.
risk-free rate.
C.
the incremental return.
D.
beta.
40) Shawhan Supply plans to maintain its optimal capital structureof 30% debt, 20% preferred stock, and 50% common stock far into thefuture. The required return on each component is: debt–10%;preferred stock–11%; and common stock–18%. Assuming a 40% marginaltax rate, what after-tax rate of return must Shawhan Supply earn onits investments if the value of the firm is to remainunchanged?
A.
13.0%
B.
10.0%
C.
18.0%
D.
14.2%
41) The XYZ Company is planning a $50 million expansion. Theexpansion is to be financed by selling $20 million in new debt and$30 million in new common stock. The before-tax required rate ofreturn on debt is 9%, and the required rate of return on equity is14%. If the company is in the 40% tax bracket, what is the marginalcost of capital?
A.
9.0%
B.
10.6%
C.
14.0%
D.
11.5%
42) Given the following information, determine the risk-freerate.
Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%
A.
8.0%
B.
7.5%
C.
6.5%
D.
7.0%
43) Zybeck Corp. projects operating income of $4 million next year.The firm’s income tax rate is 40%. Zybeck presently has 750,000shares of common stock which have a market value of $10 per share,no preferred stock, and no debt. The firm is considering twoalternatives to finance a new product: (a) the issuance of $6million of 10% bonds, or (b) the issuance of 60,000 new shares ofcommon stock. If Zybeck issues common stock this year, what willprojected EPS be next year?
A.
$2.10
B.
$2.96
C.
$1.67
D.
$2.33
44) Castle Corp. generated $2 million in operating income fromsales of $20 million during the latest fiscal year. The firm’sinterest expense was $500,000, and the corporate income tax ratewas 40%. Investors require a rate of return of 18%. Using thedependence hypothesis approach to valuation, what is the marketvalue of Castle?
A.
$9.6 million
B.
$8.3 million
C.
$5.1 million
D.
$7.2 million
E.
$6.5 million
45) Farar, Inc. projects operating income of $4 million next year.The firm’s income tax rate is 40%. Farar presently has 750,000shares of common stock, no preferred stock, and no debt. The firmis considering the issuance of $6 million of 10% bonds to finance anew product that is not expected to generate an increase in incomefor two years. If Farar issues the bonds this year, what willprojected EPS be next year?
A.
$1.53
B.
$1.98
C.
$3.12
D.
$2.33
E.
$2.72
46) _________ risk is generally considered only a paper gain orloss.
A.
Transaction
B.
Translation
C.
Financial
D.
Economic
47) Which of the following statements about exchange rates istrue?
A.
Exchange rates were fixed prior to establishing a floating-rateinternational currency system, and all countries set a specificparity rate for their currency relative either to the Canadian orto the U.S. dollar.
B.
Day-to-day fluctuations in exchange rates currently are caused bychanges in parity rates.
C.
A floating-rate international currency system has been operatingsince 1973.
D.
All of the choices.
48) Capital markets in foreign countries:
A.
offer lower returns than those obtainable in the domestic capitalmarkets.
B.
provide international diversification.
C.
in general are becoming less integrated due to the widespreadavailability of interest rate and currency swaps.
D.
all of the choices.
49) If the quote for a forward exchange contract is greater thanthe computed price, the forward contract is:
A.
overvalued.
B.
undervalued.
C.
at equilibrium.
D.
a good buy.
50) The interplay between interest rate differentials and exchangerates such that both adjust until the foreign exchange market andthe money market reach equilibrium is called the:
A.
purchasing power parity theory.
B.
balance of payments quantum theory.
C.
arbitrage markets theory.
D.
interest rate parity theory.
51) A spot transaction occurs when one currency is:
A.
deposited in a foreign bank.
B.
immediately exchanged for another currency.
C.
traded for another at an agreed-upon future price.
D.
exchanged for another currency at a specified price.
52) The purchasing power parity theory states that currencyexchange rates tend to vary ____________ with their respectivepurchasing powers in order to provide _________ purchasingpowers.
A.
inversely; similar
B.
directly; similar
C.
directly; greater
D.
inversely; greater
53) Buying and selling in more than one market to make a risklessprofit is called:
A.
profit maximization.
B.
arbitrage.
C.
cannot be determined from the above information.
D.
international trading.
54) An important (additional) consideration for a direct foreigninvestment is:
A.
political risk.
B.
maximizing the firm’s profits.
C.
attaining a high international P/E ratio.
D.
all of the above.
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