Answer questions a), b), and c) below: a) [5 marks] True or Faise? Determine whether each of the following statements is true or lalse. 1) If a project has an upfront investment cost of 55 million and a net present value (NPY) of 55 : million, the profitability index of the project should be 2 . ii) One problem of the payback rule is that it is biased against long-term projects: iii) When working capital decreases in a certain year, its effect on a project's cash flow is negative. Answers: i) True / False ii) True / False iii) True / False b) [5 marks] True or False? Determine whether each of the following statements is true or false. i) In the absence of tax, the weighted average cost of capital is equal to the unlevered cost of capital. ii) If a project results in a negative EBIT in a certain year, it can create tax shields for the firm insofar as the firm has enough taxable income from other divisions. iii) Underestimation of the CAPM beta increases the likelihood that a positive NPV project is falsely rejected. Answers: i) True/False ii) True/False iii) True / False c) [10 marks] Complete each of the following statements. i) In the CAPM framework, no reward is needed for the idiosyneratic risk, which can be reduced to a small amount through ii) The of a security is defined as the covariance between the security's return and the market return, divided by the variance of the market return. iii) In the same industry, levered equity beta varies more widely across firms than does Answers; i) ii) iii)