Part I: Multiple Choices. Choose the most appropriate ONE answer to each question. Please answers ALL FIVE questions and use spaces to separate the answers.
1. Based on CAPM, which of the following is a true statement regarding risky equity assets?
A) The stock’s total risk is measured by its Beta.
B) The firm specific risk of a stock can be reduced by diversification of investments.
C) Expected return of a company’s stock should be determined by its firm specific risk
D) Standard deviation (?) measures stock’s systematic risk.
2. Out of the following methods of evaluating projects, which one of them does not take into consideration the time value of money?
A) Payback period
B) Internal rate of return
C) Profitability index
D) Net present value
3. The internal rate of return is the:
A) rate of return needed for a project to payback within the allotted time period.
B) rate computed by discounting the cash inflows and dividing by the initial investment.
C) rate of return that equals to firm’s weighted average cost of capital.
D) discount rate that causes the net present value of a project to equal zero.
4. As the CFO of General Motor, you know your company has an overall cost of capital 9.8%. Which one of the following projects would you accept if you make your decision based on internal rate of return (IRR) and profitability index (PI) information as given below?
A) Project A with PI 98%
B) Project B with IRR 10%
C) Project C with IRR 9%
D) Project D with PI 10%
5. Which one of the following methods of raising capital is associated with tax benefit (reduce tax burden) to the firm?
A) Issuing new common stocks
B) Issuing new preferred stocks
C) Issuing new corporate bonds
D) Keeping more retained earnings in the firm