BUSINESS FINancE

Assignment

Part I Questions (1 - 13) MULTIPLE CHOICE QUESTIONS

1. If the net present value of a project which costs $10,000 is -$1,000 when the discount rate is 10%, then the: 

A. Project's IRR equals 10%.

B. Project's rate of return is greater than 10%.

C. Project's rate of return is less than 10%.

D. project's cash inflows total $9,000.

2. If the IRR for a project is 20%, then the project's NPV would be: 

A. Negative at a discount rate of 15%.

B. Positive at a discount rate of 25%.

C. Negative at a discount rate of 25%.

D. Positive at a discount rate of 20%.

 3. If a project has a cost of $50,000 and a profitability index of 0.5, then: 
A. Its cash inflows are $70,000.
B. Its NPV is $25,000.
C. Its IRR is 20%.
D. Its NPV is $20,000.

4. Projects A and B are equally risky, mutually exclusive, and have normal cash flows.  Project A has an IRR of 12%, while Project B's IRR is 10%.  The two projects have the same NPV when the discount rate is 7%.  Which of the following statements is CORRECT?

A. If the discount rate is 10%, both projects will have positive NPVs.

B. If the discount rate is 11%, Project B will have the higher NPV.

C. If the discount rate is 13%, Project A will have the lower NPV.

D. If the discount rate is 14%, both projects will have a negative NPV.

5. Sensitivity analysis evaluates projects by: 
A. Forecasting changes in interest rates that would increase financing costs.
B. Recording profitability changes while changing one variable at a time.
C. Insuring that the project sponsor has proper incentives.
D. Testing for interrelated variables.

6. Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project? 
A. A decrease in the estimated annual sales.
B. An increase in the discount rate.
C. An increase in the initial investment.
D. A decrease in the fixed costs.

7.If forecasted sales exceed the break-even level but are less than the economic break-even level, the project has a: 
A. Positive NPV but earns less than the discount rate.
B. Negative NPV but earns more than the discount rate.
C. Net loss on the income statement.
D. Net profit on the income statement.

8. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $150,000 depreciation expense, and a 30% marginal tax rate? 
A. $250,000
B. $325,000
C. $400,000
D. $500,000

9. If the standard deviation of a portfolio's returns is known to be 30 percent, then its variance is: 
A. 5.48 percent
B. 5.48 percent squared
C. 900.00 percent
D. 900.00 percent squared

10. A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio standard deviation from adding one more stock? 
A. A slight increase will occur.
B. A large increase will occur.
C. A slight decrease will occur.
D. A large decrease will occur.

11. What is the beta of a portfolio with an expected return of 12% if Treasury bills yield 6% and the market risk premium is 8%? 
A. 0.50
B. 0.75
C. 0.90
D. 1.50

12. Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"? 
A. Stock A has more unique risk.
B. Stock B plots below the security market line.
C. Stock B is a cyclical stock.
D. Stock A has a higher beta.

13. An investor divides her portfolio into four parts, with 1/4 in Treasury bills, 1/4 in a market index, 1/4 in an asset with beta of 0.8 and 1/4 in an asset with beta of 2.0. What is the beta of the investor's overall portfolio? 
A. 0.833
B. 0.950
C. 1.000
D. 1.250

 Part II Essay Questions

1. A new machine will cost $220,000 and generate after-tax cash inflows of $30,000 for 10 years. Find the NPV if the firm uses a 10% opportunity cost of capital. What is the IRR? What is the payback period? 

2. Machine A costs $350,000 to purchase, result in electricity bills of $100,000 per year, and last for 10 years. Machine B costs $550,000 to purchase, result in electricity bills of $80,000 per year, and last for 15 years. The discount rate is 12%. What are the equivalent annual costs for two models? Which model is more cost-effective?

3. Mod Inc. sellsparts for $80 each. Fixed costs are $1,200 per year and variable costs are $65 per unit. If the initial investment is $6,600 and is expected to last for 5 years and the firm pays 35% taxes, what isthe accounting and economic break-even level of sales respectively? The initial investment will be depreciated straight-line over 5 years to a final value of zero, and the discount rate is 12%. 

4. Calculate the expected return, variance, and standard deviation for the following portfolio of four stocks:

Stock 1            15.5% return

Stock 2            -9.8% return

Stock 3            6.2% return

Stock 4            2.5% return

5. Please explain systematic risk and unsystematic risk and how diversification reducesunsystematic risk.