final mcq

Question 1

net present value

Answer 1

is more useful to decision makers then internal rate of return when comparing different sized projects

Question 2

the internal rate of return (IRR)

Answer 2

• is the rate generated soleley by the cash flows of a investment
• is also the rate that cuases the net present value of a project to exactly zero

Question 3

the payback period rule accepts all investment projects in which the payback period for the cashflow is

Answer 3

positive

Question 4

How is sensitivity analysis is conducted

Answer 4

changing the value of a single variable and seeing the resulting change in the current value of a project

Question 5

Fixed costs

Answer 5

• become variable over a long period of time
• have to be paid eben if theres no production
• are affected by the number of assets owned by a firm

Question 6

what is the name of the excess return you recieve wehn you move from a risk free investment to a risky one

Answer 6

risk premium

Question 7

One year ago, you purchased a stock at a price of $32 a share. Today, you sold the stock and realized a total
return of 25%. Your capital gain was $6 a share. What was your dividend yield on this stock?

Answer 7

6.25

Question 8

Which of the following statements are correct given a constant interest rate and constant five year period of
time

Answer 8

• a increase in the future value causes the present value to increase
• there is a direct relationship between the present value and the future value

Question 9

Which of the following statements are correct

Answer 9

• A positive net present value signals an accept decision
• Projects should be accepted when the profitability index is less than 1
• A payback period that is less than the required period signals an accept decision
• When the internal rate of return exceeds the required return, a project should be accepted

Question 10

All else constant, which one of the following will increase the capital structure weight of debt as used in the
computation of a firm’s weighted average cost of capital

Answer 10

a decrease in the number of outstanding common shares

Question 11

Which one of the following should be the primary consideration when determining the appropriate cost of
capital for a specific project

Answer 11

the level of risk

Question 12

Discount Retailers has an overall beta of .96 and a cost of equity of 10.4 percent for the firm overall. The
firm is financed solely by common stock. Division A within the firm has an estimated beta of 1.13 and is the
riskiest of all of the firm’s divisions What is an appropriate cost of capital for division A if the market risk
premium is 5 percent

Answer 12

11.25 percent

Question 13

If a stock’s Beta is .8 during a period when the market portfolio was down by 10%, then, a priori, we could
expect the return on this individual stock to:

Answer 13

lose but less then 10%

Question 14

One of the easiest methods of diversifying away firm-specific risks is to

Answer 14

Purchase the shares of a mutual fund

for this question keep in mind easiest and think of somone that doesnt know anyhting

Question 15

Which of the following statements best explains the fact that cyclical firms tend to have high Betas

Answer 15

there earnigns are not stable

Question 16

Determine the market risk premium if the risk free rate is 2%, the company’s Beta is 1.3 and its expected
return is 11%.

Answer 16

D

Question 17

An IPO is an acronym that stands for

Answer 17

initial public offering

Question 18

The primary goal of corporate management should be to

Answer 18

Maximize the shareholders’ wealth