1. You are a CEO of a moped company. You are deciding whether to build a factory in Italy. The plant will cost $50 million dollars today and be straight-line depreciated to its market value of $0 in 10 years. You expect the incremental cash flows to be $2 million in year 1 and $8 million in years 2 through 10. Assume that CAPM holds. The beta of your project is 0.8. The expected market return is 14% and the risk-free rate is 4%. What is the appropriate discount rate for the project?

a. 10%

b.11%

c. 12%

d. 13%

2. Firms A and B have the same Return on Assets. If Firm A has a higher Return on Equity than Firm B, which of the following is true?

Firm A has a higher debt ratio than firm B

Firm A has a lower debt ratio than firm B

Firm A has a higher net profit margin than firm B

Firm A has a higher gross profit margin than firm B