$7.00

What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7?

a. 12.5%

b. 13%

c. 12%

d. 13.5%

** **

12. Hudson River Company common stock is currently selling for $20 per share. Security analysts at Top Quality Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Hudson River stock one year from now:

Price Rate of Return Probability

$16 -20% 0.25

20 0% 0.30

24 +20% 0.25

28 +40% 0.20

Assuming that Hudson River is not expected to pay any dividends during the coming year, determine the coefficient of variation for the rate of return on Hudson River stock.

a. 0.009

b. 2.68

c. 2.61

13. What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 = $25,000; Year 4 = $32,000?

a. 17.08%

b. 16.7%

c. 15.7%

d. 16.3%

** **

14. Short-term bank financing is available under all of the following ways except:

a. Single loans

b. Trade Credit

c. Lines of credit

d. Revolving credit agreements

** **

15. The certainty equivalent approach is a risk evaluation technique. Which of the following statements is/are correct?

I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation.

II. Using the RADR involves adjustments to the denominator of the NPV equation.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

** **

16. When a project has multiple internal rates of return:

a. the analyst should choose the highest rate to compare with the firm\'s cost of capital.

b. the analyst should choose the lowest rate to compare with the firm\'s cost of capital

c. the analyst should choose the rate that seems most \"reasonable\", given the project\'s cash flows, to compare with the firm\'s cost of capital.

d. the analyst should compute the project\'s net present value and accept the project if its NPV is greater than $0

** **

17. The aggressive approach to the financing of a firm\'s current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

a. equal, equal

b. relatively high, relatively low

c. high interest, low interest

d. none of the above

** **

18. Affirm Timer Zeta, Inc., a pharmacutical firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be ____ the marginal cost of capital for amounts over $700 million.

a. less than

b. equal to

c. greater than

d. cannot be determined from the information given

19. Affirm Timer Zeta, Inc., a pharmacutical firm currenlty has a 40 percent marginal tax rate. It also has a capital structure of $60,000,000 in debt and $140,000,000 in equity. What is the firm\'s weighted cost of capital if the marginal pretax cost of debt is 12 percent, the firm\'s average pretax cost of debt outstanding is 8%, and the cost of equity is 14.5 percent?

a. 13.75%

b. 11.59%

c. 12.31%

d. 10.45%

** **

20. What is the weighted average cost of capital for Big Fun Corporation?

Source of Capital Capital Components Cost

Long Term Debt $60,000 5.6% after-tax

Preferred Stock $15,000 10.6%

Common Stock $75,000 13.0%

a. 6.9%

b. 8.5%

c. 10.2%

d. 9.8%

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