1.Which of the following is an important difference between bonds (debt) and stock (equity)?

A.Dividend payments are tax deductible, but coupons are not

B.Bondholders are permitted to vote in corporate elections and other events

C.Creditors have legal recourse if interest or principal payments are missed, but stockholders have no legal recourse if dividends are not paid

D.The payment of dividends is mandatory, whereas coupon payments are discretionary

2.The two components of a stock's return are:

A.Coupon yield and capital gain yield

B.Interest yield and maturity yield

C.Dividend yield and capital gains yield

D.Dividend yield and maturity yield

3.Capital market history shows us that the average return relationship from lowest to highest between securities is

A. Inflation, then corporate bonds, Treasuries, small company stocks, large company stocks.

B. Treasury bills, inflation, small company stocks, large company stocks.

C. Treasury bills, corporate bonds, government bonds, large company stocks, small company stocks.

D. Treasury bills, government bonds, corporate bonds, large company stocks, small company stocks.

4.In an EBIT-EPS graphical relationship, the debt ray and equity ray cross. At this point the equity and debt are

A.Equivalent with respect to EPS but above and below this point equity is always superior.

B.At breakeven in EPS but above this point debt increases EPS via leverage and decreases EPS below this point.

C.Equal but away from breakeven equity is better as fewer shares are outstanding.

D.At breakeven and MM Proposition II states that debt is the better choice.

5.Which of the following changes would cause a stock price to increase?

A.Increase to the dividend growth rate

B.Increase to the stock's beta

C.Increase to the required rate of return

D.Increase to the risk-free rate

6.A company estimates that an average-risk project has a WACC of 12%, a below-average risk project has a WACC of 10%, and an above-average risk project has a WACC of 14%. Which of the following independent projects should the company accept?

A.Project Y has below-average risk and an internal rate of return of 9%.

B.Project X has average risk and an internal rate of return of 11%.

C.Project Z has above-average risk and an internal rate of return of 15%.

D.All of the projects above should be accepted.

7.Which of the following types of firms should have a relatively high debt-equity ratio?

A.A firm with lots of growth opportunities in the future

B.A firm in a very risky industry

C.A firm with a high level of taxable income

D.A firm with lots of intangible assets

8.Calcite Ltd used the NPV and IRR methods of investment appraisal to evaluate a project that has an initial cash outlay followed by annual net cash inflows over its life. After the evaluation had been undertaken, it was discovered that the cost of capital had been incorrectly calculated and that the correct cost of capital figure was in fact higher than that used.

What will be the effect on the NPV and IRR figures of correcting for this error?

Effect on

NPVIRR

A.DecreaseDecrease

B.DecreaseNo change

C.IncreaseIncrease

D.IncreaseNo Change

9.Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year.Compute the payback period in years.

A. 3.18 years B. 3.82 years

C. 4.00 years D. 4.55 years

10.Accepting positive NPV projects benefits the stockholders because

A. it is the most easily understood valuation process.

B. the present value of the expected cash flows are equal to the cost.

C. the present value of the expected cash flows are greater than the cost..

D. it is the most easily calculated.

11. An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has

A. a large initial investment with moderate positive cash flows over a very long period of time.

B. a very large negative cash flow at the termination of the project.

C. most of the cash flows at the beginning of the project.

D. All projects approved by the payback period rule will be accepted by the NPV rule.

12.Which of the following statement is true?

A. One must know the discount rate to compute the NPV of a project but one can compute the IRR without referring to the discount rate.

B. One must know the discount rate to compute the IRR of a project but one can compute the NPV without referring to the discount rate.

C. Payback accounts for time value of money.

D. There will always be one IRR regardless of cash flows.

13. Interest expense is typically excluded in the project cash flow because

A. all projects are always financed only by equity.

B. taxes cannot be adjusted for the correct debt rate.

C. the discount rate or WACC reflects the cost of debt.

D. the analysis is too crude to handle debt impacts.

14. The dividend growth rate is equal to the product of what two ratios?

A. ROA and current ratioB. ROE and retention ratio

C. Profit margin and ROAD. ROA and retention ratio

15.The two fatal flaws of the internal rate of return rule are

A. arbitrary determination of a discount rate and failure to consider initial expenditures.

B. arbitrary determination of a discount rate and failure to correctly analyze mutually

exclusive investment projects.

C. arbitrary determination of a discount rate and the multiple rate of return problem.

D. failure to consider initial expenditures and failure to correctly analyze mutually

exclusive investment projects.