Question #1

Hanson Truck supplies believes there will be a 35% probability of receiving a cash flow next month of $2000, a 40% probability of receiving $4000, and a 25% probability of receiving $5000. What is the coefficient of variation?

.3389

.3209

.3875

.3293

Question #2

Which of the following is considered an advantage of the IRR method of capital budget analysis?

the IRR method always works; it always gives the correct answer

all of the above

assumes cash flows are reinvested at the firm's cost of capital rate

recognizes the time value of money

Question #3

In most capital budgeting decisions, the emphasis is on reported income, rather than cash flow.

False

True

Question #4

As the time horizon for an investment becomes longer, the forecasted standard deviation for the investment remains constant while the expected value increase for each forecast of cash flow.

True

False

Question #5

Five investment alternatives have the following returns and standard deviations of returns.

Investment A, Expected Return = 1200, Standard Deviation = 300

Investment B, Expected Return = 1600, Standard Deviation = 1040

Investment C, Expected Return = 6000, Standard Deviation = 540

Investment D, Expected Return = 1000, Standard Deviation = 860

Investment E, Expected Return = 60000, Standard Deviation = 13200

Using the coefficient of variation, rank the five alternatives from lowest risk to highest risk.

A C D B E

C E A B D

D B A E C

E B D C A

Question #6

Ian Systems will invest $80,000 in a temporary project that will generate $20,000 at the end of the first year, $35,000 at the end of the second year, and $50,000 at the end of the third year. The firm will be required to spend $10,000 to close down the project at the end of three years. If the cost of capital is 10%, find what is the net present value of the project and should the investment be undertaken?

$84,673 the project should not be undertaken

$77,160 the project should be undertaken

$77,160 the project should not be undertaken

$84,673 the project should be undertaken

Question #7

There is a direct, and financially significant, mathematical relationship between the NPV and IRR of any capital project.

False

True

Question #8

You buy a new piece of equipment for $14,250, and you receive a cash inflow of $3,000 per year for 8 years. What is the internal rate of return?

11.1%

13.3%

12.2%

10.0%

Question #9

All of the following are disadvantages of the payback period method of capital budget analysis except

has a minimum acceptable payback period that is arbitrary

it ignores the time value of money

it is very complex and difficult to use, understand, and explain

ignores any cash flows after payback

Question #10

Stephenville Hardware has earnings before depreciation and taxes of $250,000, depreciation of $90,000, and a tax rate of 40 percent. Compute its cash flow.

$186,000

$96,000

$240,000

$224,000

Question #11

A basic assumption in financial theory is that most investors and managers are risk seeking- that is, for a given situation they would prefer uncertainty to certainty.

True

False

Question #12

Overall risk can be reduced by combining risky assets with low or negatively correlated assets.

False

True

Question #14

LVM Enterprises is considering investing $6,000 in a project that will result in annual cash flows of $1,600 for the next 6 years. What is the payback period for this project?

4.25 years

3.75 years

2.75 years

3.25 years

Question #15

Capital budget decisions by their nature are

strategic investments in the future of the firm

investments that have outcomes that normally are not known for years

investments made in the uncertain expectation of increasing the value of the firm

all of the above

Question #16

Stocks with betas of less than 1.0 are less risky than the market, while stocks with betas greater than 1.0 are more risky than the market.

True

False