Question: I. Choose the correct answer. (15 Marks) 1. The total amount due at the end of the investment is called the ----------------- . (A) Future
I. Choose the correct answer.(15 Marks)
1.The total amount due at the end of the investment is called the ----------------- .
(A) Future Value (B) Present Value (C) Time Value (D) Annunity Due
2. The ------------------- of an investment is the present value of the expected cash flows, less the cost of the investment.
(A) NPV (B) IRR (C) Payback Period (D) ROE
3. ----------------------- is the time it takes to recover its initial investment.
(A) NPV (B) IRR (C) Payback Period (D) ROE
4. --------------------- refers to the original sale of securities by governments and corporations.
(A) Primary market (B) Secondary market (C) Capital market
(D) Money market
5. ----------------- is a measure of profit per dollar of assets.
(A) Dividend (B) EPS (C) ROE (D) ROA
6. --------------------- refers to an infinite series of equal payments, that is, it is an annuity that lasts forever.
(A) Perpeturity (B) Annurity (C) NPV (D) IRR
7. ------------------- is a technique that expresses each financial statement item as a percent of a base amount.
(A) Ratio analysis (B)Vertical analysis (C) Break-even analysis (D) Horizontal analysis
8. ------------------ Measures the ability of the company to survive over a long period of time.
(A) Liquidity (B) Profitability (C) Solvency (D) Efficiency
9. The term ------------------ refers to the original amount borrowed or invested.
(A) simple interest (B) principal (C) compound interest (D) future value
10. The term --------------------- is also referred to as the discount rate, the cost of capital, the opportunity cost of capital, and the required return.
(A) interest rate (B) time value of money (C) compounding (D) present value
II. Write short notes on any four of the following:
(a) Debt Capital Vs Equity Capital
(b) Common Stock Vs Preferred Stock
(c) Primary Market Vs Secondary Market
(d) NPV Vs IRR
(10 Marks)
III. The company that you are working in has three projects in hand which it can consider. Table 1 depicts the cash flows of these three different projects. They are Project Alpha, Beta and Charlie. The cash flows for the next five years are provided in Table 1.
Table 1: Cash Flows of Three Different Projects
| Period | Project Alpha ($) | Project Beta ($) | Project Charlie ($) |
| Year 0 | (30,000) | (30,000) | (30,000) |
| Year 1 | 15,000 | 15,000 | 15,000 |
| Year 2 | 15,000 | 16,000 | 0 |
| Year 3 | 15,000 | 10,000 | 15,000 |
| Year 4 | 15,000 | 12,000 | 0 |
| Year 5 | 15,000 | 15,000 | 18,000 |
The firm's cost of capital is 12 percent for each project.
The questions to be answered are:
- Calculate the payback period for eachproject.
- Calculate NPV for eachproject.
- Which are the projects that are considered as viable in accordance to the NPVrule?
- Calculate profitability index for eachproject.
- Calculate the IRR for eachproject.
- The company only has funds to finance two of the projects. Which two projects should be financed?
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