Multiple Choice Answers

1. Which of the following is NOT included in the calculation of free cash flows from an asset perspective?

a. Interest expense. b. Operating expense. c. Depreciation. d. Net operating working capital.

2. What is the most important ingredient in developing a firm’s financial plan?

a. A forecast of sales revenues. b. Determining the amount of dividends to pay shareholders. c. Projecting the rate of interest on proposed new debt. d. Deciding upon which method of depreciation a firm should utilize.

3. Which of the following will increase cumulative borrowing in the cash budget?

a. Decreasing the average collection period. b. Increasing purchases.
c. Decreasing depreciation expense. d. Both A and C. e. All of the above.

4. If you invest $750 every six months at 8% compounded semi -annually, how much would you accumulate at the end of 10 years?

a. $19,065 b. $10,193 c. $22,334 d. $21,731

5. What is the present value of an annuity of $12 received at the end of each year for seven years? Assume a discount rate of 11%. The first payment will be received one year from today (round to the nearest $1).

a. $25 b. $40 c. $57 d. $118

6. What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

a. $5,790 b. $11,574 c. $9,210 d. $17,010

What is the value on 1/1/05 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $10.
Date Cash Received —- Amount of Cash

1/1/07 $100
1/1/08 $200
1/1/09 $300
1/1/10 $400
1/1/11 $500

a. $490 b. $460 c. $970 d. $450

8. You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?

Year End of Year Deposit
1 $350
2 $500
3 $725
4 $400

a. $1,622 b. $2,207 c. $2,384 d. $2,687

9. The capital asset pricing model:

a. provides a risk-return trade -off in which risk is measured in terms of the market returns.
b. provides a risk-return trade -off in which risk is measured in terms of beta.
c. measures risk as the coefficient of variation between security and market rates of return.
d. depicts the total risk of a security.

10. Siebling Manufacturing Company’s common stock has a beta of .8. If the expected risk-free return is 7% and the market offers a premium of 8% over the risk-free rate, what is the expected return of Siebling’s common stock?
a. 7%
b. 13.4%
c. 14.4%
d. 8.7%

11. You are going to invest all of your funds in one of three projects with the following distribution of possible returns:

Project 1
Standard Deviation 12% Probability Return
50% chance 20%
50% chance -4%

Project 2
Standard Deviation 19.5% Probability Return
30% chance 30%
40% chance 10%
30% chance -20%

Project 3
Standard Deviation 12% Probability Return
10% chance 30%
40% chance 15%
40% chance 10%
10% chance -21%

If you are a risk-averse investor, which one should you choose?

a. Project 1 b. Project 2 c. Project 3

12. Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have a par value of $1,000. The market rate of interest is 8%. The market value of Colby bonds is (round to the nearest dollar):

a. $1,173 b. $743 c. $1,000 d. $827

13. gives minority shareholders more power to elect board of directors.

a. Preemptive right. b. Majority voting c. Proxy fights. d. Cumulative voting

14. UVP preferred stock pays $5.00 in annual dividends. If your required rate of return is 13%, how much will you be willing to pay for one share?

a. $38.46 b. $26.26 c. $46.38 d. $65.46
15. White Sink, Inc. just paid a dividend of $5.55 per share on its common stock, and the firm is expected to generate constant growth of 12.25% over the foreseeable future. The comon stock is currently sellling for $73.75 per share. The firm’s dividend payout ratio is 40%, and White’s marginal tax rate is 40%. What is the rate of return that common stockholders expect? Round to the nearest 0.1%.

a. 8.5% b. 20.7% c. 15.5% d. 4.8%

16. Suppose you determine that the NPV of a project is $1525,855. What does that mean?

a. In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.
b. The project would add value to the firm.
c. Under all conditions, the projects’s payback would be less that the profitability index.
d. The project’s IRR would have to be less than the firm’s discount rate

17. Artie’s Soccer Ball Company is considering a project with the following cash flows: Initial outlay= $750,000 Incremental alter-tax cash flows from operations Years 1-4 = $250,00 per year. Compute the NPVof this project if the company’s discount rate is 12%.

a. $9,337 b. $7,758 c. $4,337 d. $2,534

18. What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for
Years 3 through 5?

a. 3 1/2 b. 4 1/2 c. 4 2/3 d. 5