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1. You are advising a friend who is attempting to decide whether or not to drop one of the
courses they are currently enrolled in. If they drop, they will forfeit the money spent on
tuition. Which of the following regarding the drop decision is inconsistent with capital
budgeting principles?
A)
B)
C)
D)
E)
I. Remaining in the class means you must give up your part-time job.
II. The tuition cost for the class was outrageous, $1,000 per credit hour.
III. If you drop the class, you can sell the textbook now for $30 at the bookstore.
I only
II only
I and III only
II and III only
I, II, and III
2. A firm is considering a project which would increase accounts receivable by $10,000,
accounts payable by $55,000, and inventory by $30,000. Which of the following is true?
A) Net working capital has increased.
B) Sales will increase.
C) Payments to creditors will slow.
D) Net working capital has decreased.
E) This is a net use of cash.
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the
1960s era. They expect to sell 250 blocks annually for the next 5 years. The necessary foundry
and machining equipment will cost a total of $800,000 and will be depreciated on a straight-line
basis to zero over the project's life. The firm expects to be able to dispose of the manufacturing
equipment for $150,000 at the end of the project. Labor and materials costs total $500 per engine
block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate.
3.
A)
B)
C)
D)
E)
What is the annual depreciation tax shield for this project?
$ 20,000
$ 56,000
$100,000
$104,000
$120,000
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4. What is the expected aftertax cash flow to the firm when the equipment is sold in year
5?
A) $ 65,000
B) $ 97,500
C) $100,000
D) $115,000
E) $120,125
5. What is the minimum bid price the firm should set as a sale price for the blocks if the
firm were in a bidding situation?
A) $1,692
B) $1,927
C) $2,382
D) $2,564
E) $2,821
6.
A)
B)
C)
D)
E)
The sales level that results in a project net present value exactly equal to zero is called:
Operational break-even.
Leveraged break-even.
Accounting break-even.
Cash break-even.
Financial break-even.
7. Which of the following project analysis methods likely would be the most useful in
identifying the one forecast variable with the greatest estimation risk?
A) scenario analysis
B) simulation analysis
C) strategic options analysis
D) break-even analysis
E) sensitivity analysis
8. Find the accounting break-even point given the following information: Total costs =
$15,000; variable cost = $2 per unit; sales = 4,000 units; price = $5; depreciation =
$3,000.
A) 1,667 units
B) 2,000 units
C) 2,333 units
D) 2,667 units
E) 3,333 units
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9. Given the following information, what is the degree of operating leverage? Price = $10
per unit; variable cost = $6 per unit; fixed costs = $5,000 per year; depreciation =
$8,000 per year; sales = 2,000 units per year. Ignore tax effects.
A) 0.75
B) 1.33
C) 1.83
D) 2.67
E) 2.90
10. The hypothesis that market prices reflect all publicly-available information is called
efficiency in the:
A) Open form.
B) Strong form.
C) Semi-strong form.
D) Weak form.
E) Stable form.
11. Over the past 75 years, which of the following investments has provided the smallest
average return?
A) Small company stocks
B) Common stocks
C) Treasury bills
D) Treasury bonds
E) Corporate bonds
12.
A)
B)
C)
D)
E)
Standard deviation is one of the most common measures of __________.
the normal distribution
the inflation rate
the risk premium
return on investment
return volatility
13. You purchased 500 shares of preferred stock on January 1, 2001 for $85 per share. The
stock pays an annual dividend of $12 per share. On December 31, 2001 the market price
is $91 per share. What is your total dollar return for the year?
A) $ 3,000
B) $ 4,500
C) $ 6,000
D) $ 9,000
E) $12,000
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14.
A)
B)
C)
D)
E)
Which of the following would be considered an example of unsystematic risk?
Higher quarterly loss than expected for Microsoft.
Lower consumer spending than expected.
Latest unemployment figures increased as expected.
The CEO of AT&T retired as he had promised he would last month.
The Fed unexpectedly increases interest rates.
15. Ed Lawrence has $100,000 invested. Of that, $30,000 is invested in IBM stock, $25,000
is invested in T-bills, and the remainder is invested in corporate bonds. Which of the
following is true regarding his portfolio?
A) Ed has 30% of his portfolio invested in stocks.
B) Ed has 55% of his portfolio invested in corporate bonds.
C) If IBM has a beta less than one, the portfolio has a beta greater than one.
D) Ed has 70% of his portfolio invested in risk-free assets.
E) Changes in the return on IBM stock will have the greatest impact on changes in the
portfolio return.
16. Asset A has an expected return of 20.4% and a beta of 1.6. The expected market return
is 15%. What is the risk-free rate?
A) 2%
B) 4%
C) 5%
D) 6%
E) 8%
State
Boom
Bust
17.
A)
B)
C)
D)
E)
Probability
.65
.35
Return on A
0.30
0.10
Return on B
0.05
0.20
What is the expected return on security B?
0.0733
0.0867
0.0950
0.1025
0.1250
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18. What is the expected return on a portfolio that equally-weighted amongst A, B, and the
risk-free asset? The risk free rate is 5%.
A) 0.0925
B) 0.1275
C) 0.1450
D) 0.1633
E) 0.1825
19.
A)
B)
C)
D)
E)
What is the standard deviation of security A?
0.0091
0.0365
0.0954
0.1247
0.1630
20. The EAC method for evaluating projects applies when which of the following project
characteristics exist?
A)
B)
C)
D)
E)
I. The projects are mutually exclusive.
II. The projects have different economic lives.
III. The projects will not be replaced.
III only
I and II only
I and III only
II and III only
I, II, and III
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Answer Key
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
B
D
B
B
B
E
E
E
D
C
C
E
D
A
A
D
D
B
C
B
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