A call provision gives bondholders the right to demand

QUESTION 1

1. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

True

False

QUESTION 2

1. Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

True

False

QUESTION 3

1. Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

True

False

QUESTION 4

1. The corporate valuation model cannot be used unless a company doesn't pay dividends.

True

False

QUESTION 5

1. Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

True

False

QUESTION 6

1. Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital for use in capital budgeting during the current year is the after-tax cost of debt.

True

False

QUESTION 7

1. When estimating the cost of equity by use of the bond-yield-plus-risk-premium method, we can generally get a good idea of the interest rate on new long-term debt, but we cannot be sure that the risk premium we add is appropriate. This problem leaves us unsure of the true value of r_s.

True

False

QUESTION 8

1. If a firm is privately owned, and its stock is not traded in public markets, then we cannot measure its beta for use in the CAPM model, we cannot observe its stock price for use in the DCF model, and we don't know what the risk premium is for use in the bond-yield-plus-risk-premium method. All this makes it especially difficult to estimate the cost of equity for a private company.

True

False

QUESTION 9

1. A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).

True

False

QUESTION 10

1. Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive NPV.

True

False

QUESTION 11

1. No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects' cost of capital exceeds the rate at which the projects' NPV profiles cross.

True

False

QUESTION 12

1. If the IRR of normal Project X is greater than the IRR of mutually exclusive (and also normal) Project Y, we can conclude that the firm should always select X rather than Y if X has NPV > 0.

True

False

QUESTION 13

1. Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.

True

False

QUESTION 14

1. In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.

True

False

QUESTION 15

1. Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR) is affected by a small change in one of the input variables, say sales. Other things held constant, with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis, the steeper the graph of the relationship line, the more risky the project, other things held constant.

True

False

QUESTION 16

1. The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options. If D'Amico's stock underperforms the market, these options will necessarily be worthless.

True

False

QUESTION 17

1. Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

True

False

QUESTION 18

1. Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

True

False

QUESTION 19

1. Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.

True

False

QUESTION 20

1. The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

True

False

QUESTION 21

1. Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

True

False

QUESTION 22

1. Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

True

False

QUESTION 23

1. For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

True

False

QUESTION 24

1. The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

True

False

QUESTION 25

1. If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

True

False

QUESTION 26

1. If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.

True

False

QUESTION 27

1. Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

True

False

QUESTION 28

1. From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.

True

False

QUESTION 29

1. It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm are negative.

True

False

QUESTION 30

1. If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the low standard deviation stock.

True

False

QUESTION 31

1. The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by managerial actions.

True

False

QUESTION 32

1. We will almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

True

False

QUESTION 33

1. If markets are in equilibrium, which of the following conditions will exist?

	a.	All stocks should have the same realized return during the coming year.
	b.	All stocks should have the same expected return as seen by the marginal investor.
	c.	Each stock's expected return should equal its realized return as seen by the marginal investor.
	d.	The expected and required returns on stocks and bonds should be equal.
	e.	Each stock's expected return should equal its required return as seen by the marginal investor.

QUESTION 34

1. When working with the CAPM, which of the following factors can be determined with the most precision?

	a.	The expected rate of return on the market, rM.
	b.	The beta coefficient, bi, of a relatively safe stock.
	c.	The beta coefficient of "the market," which is the same as the beta of an average stock.
	d.	The most appropriate risk-free rate, rRF.
	e.	The market risk premium (RPM).

QUESTION 35

1. The Anderson Company has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 12%. The CFO believes that this is the correct WACC for the company's average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO's position is accepted, what is likely to happen over time?

	a.	Things will generally even out over time, and, therefore, the firm's risk should remain constant over time.
	b.	The company will take on too many low-risk projects and reject too many high-risk projects.
	c.	The company's overall WACC should decrease over time because its stock price should be increasing.
	d.	The company will take on too many high-risk projects and reject too many low-risk projects.
	e.	The CEO's recommendation would maximize the firm's intrinsic value.

QUESTION 36

1. Which of the following statements is CORRECT?

	a.	If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.
	b.	Flotation costs associated with issuing new common stock normally reduce the WACC.
	c.	WACC calculations should be based on the before-tax costs of all the individual capital components.
	d.	A change in a company's target capital structure cannot affect its WACC.
	e.	An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.

QUESTION 37

1. Which of the following statements is CORRECT?

	a.	For a project to have more than one IRR, then both IRRs must be greater than the WACC.
	b.	If a project is independent, then it cannot have multiple IRRs.
	c.	If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.
	d.	Multiple IRRs can occur only if the signs of the cash flows change more than once.
	e.	If two projects are mutually exclusive, then they are likely to have multiple IRRs.

QUESTION 38

1. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

	a.	To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.
	b.	A project's MIRR is always greater than its regular IRR.
	c.	If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.
	d.	To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.
	e.	A project's MIRR is always less than its regular IRR.

QUESTION 39

1. Which of the following statements is CORRECT?

	a.	A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores.
	b.	A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
	c.	A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
	d.	A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
	e.	Sunk costs were formerly hard to deal with but now that the NPV method is widely used, it is possible to simply include sunk costs in the cash flows and then calculate the PV of the project.

QUESTION 40

1. Which of the following statements is CORRECT?

	a.	An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline.
	b.	Identifying an externality can never lead to an increase in the calculated NPV.
	c.	Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.
	d.	An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality.
	e.	The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.

QUESTION 41

1. Which of the following factors should be included in the cash flows used to estimate a project's NPV?

	a.	Cannibalization effects, but only if those effects increase the project's projected cash flows.
	b.	Interest on funds borrowed to help finance the project.
	c.	Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
	d.	All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
	e.	The end-of-project recovery of any working capital required to operate the project.

QUESTION 42

1. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

	a.	The bond is selling below its par value.
	b.	If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
	c.	The bond is selling at a discount.
	d.	If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
	e.	The bond's current yield is greater than 9%.

QUESTION 43

1. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

	a.	A 10-year zero coupon bond.
	b.	A 3-year bond with a 10% coupon.
	c.	A 1-year bond with a 15% coupon.
	d.	An 8-year bond with a 9% coupon.
	e.	A 10-year bond with a 10% coupon.

QUESTION 44

1. A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?

	a.	If market interest rates decline, the price of the bond will also decline.
	b.	If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
	c.	The bond is currently selling at a price below its par value.
	d.	The bond should currently be selling at its par value.
	e.	If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.

QUESTION 45

1. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)

	a.	Stock B must be a more desirable addition to a portfolio than A.
	b.	Stock A must be a more desirable addition to a portfolio than B.
	c.	The expected return on Stock A should be greater than that on B.
	d.	The expected return on Stock B should be greater than that on A.
	e.	When held in isolation, Stock A has more risk than Stock B.

QUESTION 46

1. Recession, inflation, and high interest rates are economic events that are best characterized as being

	a.	among the factors that are responsible for market risk.
	b.	company-specific risk factors that can be diversified away.
	c.	systematic risk factors that can be diversified away.
	d.	irrelevant except to governmental authorities like the Federal Reserve.
	e.	risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.

QUESTION 47

1. If a firm's expected growth rate increased then its required rate of return would

	a.	fluctuate less than before.
	b.	fluctuate more than before.
	c.	increase.
	d.	possibly increase, possibly decrease, or possibly remain constant.
	e.	decrease.

QUESTION 48

1. If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

	a.	The stock's dividend yield is 5%.
	b.	The stock's required return must be equal to or less than 5%.
	c.	The price of the stock is expected to decline in the future.
	d.	The expected return on the stock is 5% a year.
	e.	The stock's price one year from now is expected to be 5% above the current price.

QUESTION 49

1. Which of the following statements is NOT CORRECT?

	a.	The corporate valuation model can be used to find the value of a division.
	b.	Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.
	c.	An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.
	d.	The corporate valuation model discounts free cash flows by the required return on equity.
	e.	The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

QUESTION 50

1. Which is the best measure of risk for an asset held in isolation, and which is the best measure for an asset held in a diversified portfolio?

	a.	Standard deviation; correlation coefficient.
	b.	Variance; correlation coefficient.
	c.	Coefficient of variation; beta.
	d.	Beta; beta.
	e.	Beta; variance.

QUESTION 51

1. 
   If Tall Paul can earn 6.5% on comparable bonds, what value would he place on bonds issued by the Bieg Company that have an 5.25% coupon rate, semi-annual payments, $1,000 face value, and 10 years to maturity? (Round Your Answer to 2 Decimal Places: X.XX)

1. The McDonnell Company has outstanding bonds with a coupon rate of 6.75% and semi-annual payments. The bonds are redeemable at their face value on December 30, 2032. If Weege can earn 5% on comparable investments and settle the transaction on March 24, 2015, how much should he be willing to pay per $100 of face value for the bond? (Round Your Answer to 2 Decimal Places: X.XX)

QUESTION 53

1. 
   A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
   
   What is the bond’s yield to maturity? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 54

1. 
   A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
   
   What is the bond’s current yield? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 55

1. 
   A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
   
   What is the bond’s capital gain or loss yield? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 56

1. 
   A 10-year, 12% semiannual coupon bond with a par value of $1000 may be called in four years at a call price of $1,060. The bond sells for $1,100. Assume that the bond has just been issued.
   
   What is the bond’s yield to call? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 57

1. 
   Onions Tatlow Enterprises is considering a capital project that has a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
   
   STATE OF PROBABILITY RATES OF RETURN
   THE ECONOMY OF EACH STATE IF STATE OCCURS
   OCCURRING
   Boom .20 20%
   Normal .40 10
   Recession .40 -8
   
   What is the project’s expected return? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 58

1. 
   Onions Tatlow Enterprises is considering a capital project that has a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
   
   STATE OF PROBABILITY RATES OF RETURN
   THE ECONOMY OF EACH STATE IF STATE OCCURS
   OCCURRING
   Boom .20 20%
   Normal .40 10
   Recession .40 -8
   
   What is the project’s standard deviation? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

QUESTION 59

1. 
   Onions Tatlow Enterprises is considering a capital project that has a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
   
   STATE OF PROBABILITY RATES OF RETURN
   THE ECONOMY OF EACH STATE IF STATE OCCURS
   OCCURRING
   Boom .20 20%
   Normal .40 10
   Recession .40 -8
   
   What is the project’s Coefficient of Variation? (Round Your Answer to 2 Decimal Places)

QUESTION 60

1. 
   The Geezer Keyes Company is considering two capital projects that have a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
   
   STATE OF PROBABILITY RATES OF RETURN
   THE ECONOMY OF EACH STATE IF STATE OCCURS
   OCCURRING
   A B
   Boom .20 4% 25%
   Normal .40 5 12
   Recession .40 10 -2
   
   Expected Return 6.80% 9.00%
   Standard Deviation 2.64% 10.12%
   
   
   What is the covariance of the returns for projects Aand B? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX%)

UESTION 61

1. 
   The Geezer Keyes Company is considering two capital projects that have a one year life and project returns dependent on the state of the economy. The estimated rates of return are shown below:
   
   STATE OF PROBABILITY RATES OF RETURN
   THE ECONOMY OF EACH STATE IF STATE OCCURS
   OCCURRING
   A B
   Boom .20 4% 25%
   Normal .40 5 12
   Recession .40 10 -2
   
   Expected Return 6.80% 9.00%
   Standard Deviation 2.64% 10.12%
   
   What is the correlation of the returns for projects A and B? (Round Your Answer as a Percentage, For Example XX%)

QUESTION 62

1. If the risk free rate of return is 2% and the expected return on the market is 8%, what rate of return would investors require on a stock of the Big Bob Kostin Company with a beta of 1.75? (Round Your Answer as a Percentage with 2 Decimal Places, For Example: X.XX %)

QUESTION 63

1. 
   The Porch Higgins Company’s last dividend was $2.50. The current price of the stock is $50 and the firm is expected to grow 5% per year.
   
   What is the firm’s dividend yield? (Round Your Answer as a Percentage With 2 Decimal Places, For Example: X.XX%)

QUESTION 64

1. 
   The Porch Higgins Company’s last dividend was $2.50. The current price of the stock is $50 and the firm is expected to grow 5% per year.
   
   What is the firm’s capital gains yield? (Round Your Answer as a Percentage With 2 Decimal Places, For Example: X.XX%)

QUESTION 65

1. 
   The Porch Higgins Company’s last dividend was $2.50. The current price of the stock is $50 and the firm is expected to grow 5% per year.
   
   What is the expected yield on the stock? (Round Your Answer as a Percentage With 2 Decimal Places, For Example: X.XX%)

QUESTION 66

1. You have been asked to value the common stock of the Lumpy Boothman Company. The firm’s last dividend was $3.00. You expect the firm’s dividends to grow by 4%. If an investor can earn a 9% return on comparable investments, what would be the value of the stock? (Round Your Answer to 2 Decimal Places)

QUESTION 67

1. The Bad Man Frazier Company has a historical growth in its free cash flows of 4% with little variability. With the addition of a new plant and equipment, however, you expect that free cash flows will grow 3% in year 1, 5% in year 2, 7% in years 3 to 5, and 5% thereafter. The firm’s last free cash flow was $175,000. The firm has a required rate of return of 10%. The book value of operating assets is $1,000,000. The market value of non-operating assets is $900,000. The market value of the firm’s debt is $1,500,000 and the market value of the preferred stock is $500,000. What will be the market value of the firm’s common equity? (Round Your Answer to The Nearest Dollar)

QUESTION 68

1. The Johnny Joe McGovern Company has the following capital structure that it considers optimal:
   
   DEBT 30%
   PREFERRED STOCK 10%
   COMMON STOCK 60%
   
   The firm plans to spend $100,000,000 on new capital projects. New bonds can be sold at par with an 8% coupon rate. Preferred stock can be sold with a dividend of $2.75, a par value of $25.00, and a floatation cost of $2.00 per share. Common stock is presently selling at $35.00 per share. The last dividend paid was $3.00 and the firm expects to grow at a rate of 4% in the foreseeable future. The firm's marginal tax rate is 40%. Calculate the firm’s weighted average cost of capital. (Round Your Answer as a Percentage With 2 Decimal Places, For Example: X.XX%)

QUESTION 69

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the project’s payback period? (Round Your Answer to 2 Decimal Places)

QUESTION 70

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the project’s discounted payback? (Round Your Answer to 2 Decimal Places)

QUESTION 71

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the project net present value? (Round Your Answer to 2 Decimal Places)

QUESTION 72

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the internal rate of return? (Round Your Answer as a Percentage With 2 Decimal Places, For Example: X.XX%)

QUESTION 73

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the project’s modified internal rate of return? (Round Your Answer as a Percentage With 2 Decimal Places, For Example: XX.XX%)

QUESTION 74

1. You are the financial analyst for the Glad It’s Finally Over Company. The director of capital budgeting has asked you to analyze a proposed capital investment. The project has a cost of $20,000, and the cost of capital is 10 percent. The project’s expected net cash flows are as follows:
   
   Year Expected Net Cash Flow
   0 ($20,000)
   1 9,500
   2 6,000
   3 6,000
   4 4,000
   
   What is the project’s profitability index? (Round Your Answer to 2 Decimal Places)

QUESTION 1

Mary invested $30,000 in a security 10 years ago that earned 6% interest compounded annually. How much does Mary have now? (round to two decimal places)

QUESTION 2

Shawn presently has $4,275 in a bank account earning 4% interest, compounded semi-annually. How much will Shawn have in 20 years? (round to two decimal places)

QUESTION 3

Ed wants to buy a boat in 3 years. If he expects to need $50,000 for the boat, how much should Ed deposit today if he can earn 5.25%, compounded annually, on his investments? (round to two decimal places)

QUESTION 4

Matt wants to have $4,000 in 3 years to buy a new jet ski. How much should Matt deposit today if he can earn 5% compounded semiannually? (round to two decimal places)

QUESTION 5

James plans to invest $4,000 per year, starting next year, in an IRA for the next 35 years. If he can earn 8.75% interest, how much will James have at the end of the 35 years? (round to two decimal places)

QUESTION 6

Kathy wants to spend $5,000 per year, starting next year, for the next 4 years. How much must Kathy invest today to meet her spending goal if she can earn 6% on her investments? (round to two decimal places)

QUESTION 7

Ginger borrowed $35,000 for 4 years at 7.5% interest. What will be Ginger’s annual payment on the loan? (round to two decimal places)

QUESTION 8

Isabel plans to borrow $35,000 to buy a new car. If she will have to pay 9% interest on a five-year loan, what will be Isabel’s monthly loan payment? (round to two decimal places)

QUESTION 9

Doug presently has $14,000 in a security earning 5.75% interest, compounded annually. How long will it take for the value of Doug’s security to be worth $22,000? (round to two decimal places)

QUESTION 10

What rate of return did Steve earn on an investment property that he purchased for $225,000 six years ago if it is currently worth $650,000? (round to two decimal places)

UESTION 11

If Brooke can earn 6.75% on comparable bonds, what value would she place on bonds issued by the Andrews Company that have an 8.5% coupon rate, annual payments, $1,000 face value, and 14 years to maturity? (Round to two decimal places)

QUESTION 12

The Chaplin Company issued bonds several years ago with a 6.5% coupon rate and semi-annual coupon payments. If the bonds have 12 years to maturity and Charlie requires a 4.75% rate of return for this type of investment, what is the value of the bonds per $100 of face value? (Round to two decimal places)

QUESTION 13

The Big Fish Company has bonds outstanding with a 7.5% coupon rate, annual payments, and 15 years to maturity. If Brian requires a 10% return for this type of investment, what would be the value of the bond per $100 of face value? (Round to two decimal places)

QUESTION 14

Bogart Inc. has bonds outstanding with a 6% coupon rate, semi-annual payments, $1,000 face value, and 14 years to maturity. If Humphrey requires a 8% return for this type of investment, what would be the value of the bond? (Round to two decimal places)

QUESTION 15

Lincoln Inc. has bonds outstanding with a 6% coupon rate, semi-annual payments, 1,000 face value, and 2 years to maturity. If Abe requires a 6% return for this type of investment, what would be the value of the bond? (Round to two decimal places)

QUESTION 16

Mike is considering buying The Reynolds Company bonds that have a 10.5% coupon rate, annual coupon payments, and 6 years to maturity. If Mike can buy the bonds for $117.50 per $100 of face value, what will be his yield to maturity? (Round to two decimal places)

QUESTION 17

What is the yield to maturity of the Billie Bob Boat Company bonds that have a 12.5% coupon rate, semi-annual coupon payments, 8 years to maturity, $1,000 maturity value, and a price of $1,125? (Round to two decimal places)

QUESTION 18

What is the yield to maturity of the Barrel Surf Company bonds that have a 8.5% coupon rate, annual coupon payments, 12 years to maturity, $1,000 maturity value, and a price of $885? (Round to two decimal places)

QUESTION 19

The Gannon Company has bonds outstanding with a maturity of 7 years, a coupon rate of 10%, and semi-annual payments. If Bob can buy the bonds for $88.75 per $100 of maturity value, what will be his yield to maturity? (Round to two decimal places)

QUESTION 20

The Life is Great Company has bonds outstanding with a maturity of 3 years, a coupon rate of 10%, and semi-annual payments. If Mary can buy the bonds for $100 per $100 of maturity value, what will be her yield to maturity? (Round to two decimal places)

QUESTION 21

The Wildwood Nights T Shirt Company is considering the purchase of new equipment for producing their T shirts. If the new equipment has the following expected net cash flows, what is the payback period for the project? (Round your answer to the closest year.)

Year Expected Cash Flows

0 ($75,000)

1 24,000

2 35,000

3 31,000

4 31,000

5 31,000

6 27,000

QUESTION 22

The Reel Finance Company is considering the purchase of new hardware and software. As the financial analyst for the firm, you have been asked to calculate the project’s net present value. The firm has a cost of capital of 12% and the project’s expected net cash flows are as follows. (Round your answer to the nearest dollar.)

Year Expected Cash Flows

0 ($28,000)

1 9,000

2 9,000

3 9,000

4 9,000

5 9,000

6 9,000

QUESTION 23

The O’Brien Offshore Oil Company is considering the purchase of new equipment to drill for offshore oil more efficiently and with lower risk of spillage. If the firm has a cost of capital of 14% and the new equipment has the following expected net cash flows, what is the net present value for the project? (Round your answer to the nearest dollar.)

Year Expected Cash Flows

0 ($77,000,000)

1 26,000,000

2 34,000,000

3 42,000,000

4 48,000,000

5 56,000,000

6 25,000,000

QUESTION 24

The Cummings Company is considering the purchase of new circle cutting equipment. As the financial analyst for the firm, you have been asked to calculate the equipment’s internal rate of return. The equipment’s expected net cash flows are as follows. (Round your answer to the nearest percent.)

Year Expected Cash Flows

0 ($16,000)

1 5,000

2 5,000

3 5,000

4 5,000

5 5,000

6 5,000

QUESTION 25

The Cotton Company is considering the purchase of new circle cutting equipment. As the financial analyst for the firm, you have been asked to calculate the equipment’s internal rate of return. The equipment’s expected net cash flows are as follows. (Round your answer to the nearest percent.)

Year Expected Cash Flows

0 ($18,000)

1 5,000

2 6,000

3 6,000

4 6,000

5 5,000

6 4,000