1. Two types of batteries are being considered for use in electric golf carts. Burnout brand
has a 3 year life, while Longlasting brand has a 5 year life. You must choose between
the two batteries and you expect to continually replace the brand you ultimately choose.
You should:
A) Take the option with the greater NPV.
B) Take the option with the lower NPV.
C) Take the option with the greater EAC.
D) Take the option with the smaller EAC.
E) Take the option with the lowest accounting break-even.
2. An analysis of what happens to NPV estimates when only one variable is changed is
called:
A) Forecasting analysis.
B) Scenario analysis.
C) Sensitivity analysis.
D) Simulation analysis.
E) Break-even analysis.
3. If project OCF is equal to the project depreciation expense, then the project must be
operating at its:
A) Financial break-even point.
B) Accounting break-even point.
C) Cash flow break-even point.
D) Maximum level of net income.
E) Minimum level of production costs.
4.
A)
B)
C)
D)
E)
An efficient capital market is one in which:
Brokerage commissions are zero.
Taxes are irrelevant.
Securities always offer a positive rate of return to investors.
Security prices are guaranteed (by the Securities and Exchange Commission) to be fair.
Security prices reflect available information.
A 3-year project will cost $60,000 to construct. This will be depreciated straight-line to zero over
the 3-year life. Projected sales = 7,000 units per year, price per unit = $20 and variable cost per
unit = $10. Fixed costs = $30,000 per year. The tax rate = 30% and the required return = 15%.
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5.
A)
B)
C)
D)
E)
What is the operating cash flow in year 2?
$17,000
$20,000
$34,000
$48,000
$55,000
6.
A)
B)
C)
D)
E)
The depreciation tax shield for this project is _______ per year.
$ 6,000
$14,000
$18,000
$32,000
$42,000
7.
A)
B)
C)
D)
E)
What is the cash break-even point? (Ignore taxes)
1,800
3,000
4,200
5,000
7,000
8. Assume a salvage company will pay $10,000 for the assets at the end of year 3. Also
assume the project requires an initial investment of $10,000 in net working capital.
What is the NPV?
A) The NPV is negative
B) $11,347
C) $14,416
D) $18,807
E) The NPV is greater than $20,000
9. Over the past 75 years, which of the following investments has provided the largest
average return?
A) Small company stocks
B) Common stocks
C) Treasury bills
D) Treasury bonds
E) Corporate bonds
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10. An investor that bribes a filing clerk at the SEC to get a look at company documents 10
minutes before they are posted to the SEC's website, is essentially convinced that
markets are NOT:
A) Weak form efficient.
B) Semi-weak form efficient.
C) Semi-strong form efficient.
D) Strong form efficient.
E) NYSE stock efficient.
11. You purchased 500 shares of preferred stock on January 1, 2001 for $50 per share. The
stock pays an annual dividend of $8 per share. On December 31, 2001 the market price
is $54 per share. What is your percentage return on investment for the year?
A) 4%
B) 8%
C) 16%
D) 20%
E) 24%
12.
A)
B)
C)
D)
E)
A portfolio is _____.
a group of assets, such as stocks and bonds, held as a collective unit by an investor
the expected return on a risky asset
the expected return on a collection of risky assets
the variance of returns for a risky asset
the standard deviation of returns for a collection of risky assets
13. A project costs $60,000, will be depreciated straight-line to zero over its 4 year life, and
will require a net working capital investment of $5,000 up-front. The firm has a tax rate
of 35% and a required return of 10%. The project generates OCF of $22,000. What is
the project's NPV?
A) $ 6,724
B) $ 8,152
C) $ 9,393
D) $10,393
E) $12,485
14.
A)
B)
C)
D)
E)
Which of the following would be considered an example of systematic risk?
Intel reports record sales.
Quarterly profit for GM equals expectations.
Lower quarterly sales for IBM than expected.
Greater new jobless claims than expected.
Fed leaves interest rates unchanged, as expected.
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15. What is the risk premium for the following returns if the risk-free rate is 4%?
State
Boom
Good
Recession
Depression
A)
B)
C)
D)
E)
Probability
.20
.55
.15
.10
Return
.75
.25
-.10
-.50
0.3325
0.1525
0.0525
0.1825
0.2225
16. What is the variance of the following returns?
State
Boom
Good
Recession
Depression
A)
B)
C)
D)
E)
Probability
.20
.55
.15
.10
Return
.75
.25
-.10
-.50
0.0413
0.1239
0.1944
0.2601
0.3519
17. Asset A has an expected return of 10%. The expected market return is 14% and the
risk-free rate is 5%. What is asset A's beta?
A) 0.33
B) 0.55
C) 0.67
D) 0.88
E) 1.15
18. You form a portfolio by investing equally in A (beta=0.6), B (beta=1.6), the risk-free
asset, and the market portfolio. What is your portfolio beta?
A) 0.6
B) 0.8
C) 1.0
D) 1.2
E) 1.6
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19. If the DOL = 1.5 and OCF rises from $30,000 to $40,000, the percentage change in
sales = ?
A) 15.0%
B) 18.6%
C) 22.2%
D) 33.3%
E) 50.0%
20. A cost that has already been paid, or the liability to pay has already been incurred, is
a(n):
A) Salvage value expense.
B) Net working capital expense.
C) Sunk cost.
D) Opportunity cost.
E) Erosion cost.
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Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
D
C
B
E
C
A
B
D
A
D
E
A
B
D
D
B
B
B
C
C
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