MIDTERM 2018, questions PDF

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1. A corporation, potentially, has infinite life because it A. is a legal entity. B. has the same ownership and management. C. has limited liability. D. is closely regulated. E. None of the above A

2. Limited liability is an important feature of A. sole proprietorships. B. partnerships. C. corporations. D. both partnerships and corporations. E. None of the above C

3. The choice of the proper mixture of debt and equity, used to finance a corporation, is also referred to as the A. capital budgeting decision. B. capital structure decision. C. investment decision. D. liquidity decision. E. None of the above B

4. The following statements describe some possible sequence of cash flows between financial markets and the firm.

a) Cash is raised by selling financial assets to investors. b) Cash is invested in the firm's operation and used to purchase real assets. c) Cash is generated by the firm's operations. d) Cash is reinvested or returned to investors. Which statement is correct? A. statement a) B. statements b) and c) C. statement d) D. they are all correct E. None of the above D.

5. The present value of $100 expected 3 years from today at a discount rate of 7.275 percent is A. $112.36. B. $81.00. C. $100.00. D. $89.00. E. None of the above B

81.00362051

6. If the present value of €300 expected one year from today is €200, what is the one-year discount rate? A. 10 percent B. 15 percent C. 25 percent D. 50 percent E. None of the above D

50%

7. An initial investment of €20000 is expected to produce an end-of-year cash flow of €110000. What is the NPV of the project at a discount rate of 10 percent? A. €176,000 B. €80,000 C. €243,000 D. $66,000 E. None of the above B

80000

8. At an interest rate of 8 percent, which of the following sequences of cash flows should you prefer? Year 1 Year 2 Year 3 A)

300

300

400

B)

100

300

600

C)

400

300

300

D)

Any of the above as all add up to €1000

A. Option A B. Option B C. Option C D. Option D E. None of the above C

8%

9. What is the present value of $30000 per year in perpetuity at an annual interest rate of 5 percent? Assume the perpetuity starts in one year. A. $50,000 B. $100,000 C. $60,000 D. $15,000 E. None of the above E

None of the above, the right answer is $600,000

10. Jean Mansion has taken a $200000 mortgage loan on her house at an interest rate of 2 percent per year. If the mortgage calls for 15 equal annual payments, what is the amount of each payment? A. $21,796.14 B. $15,565.09 C. $26,882.43 D. $12,327.18 E. None of the above B

15565.09445

11. If the cash flows for Project “Green Energy” are C0 = -1000; C1 = +300; C2 = +515; and C3 = +678, calculate the IRR for the project. A. 24 percent B. 20 percent C. 16 percent D. 12 percent E. None of the above B

20.00%

12. Wind System Company is considering investing in a new project. The project will need an initial investment of €-3000000 and will generate €1300000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 10 percent. A. €169, 935 B. €1,300,000 C. €339,870 D. €232,907 E. None of the above D

232 907.59 €

10%

13. For the case of an electric car project, the following costs should be treated as incremental costs when deciding whether to go ahead with the project except

A. the consequent reduction in sales of the company's existing gasoline models (i.e., incidental effects) B. the value of tools that will be transferred to the project from the company's existing plants instead of being sold. C. interest payments on debt incurred to finance the project. D. the expenditure on new plants and equipment. E. None of the above C

14. Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n) A. sunk cost. B. opportunity cost. C. fixed cost. D. incremental cost. E. None of the above A

15. For the case of a solar energy project, which of the following costs or cash flows should be considered as incremental when analyzing whether to invest in the project? A. The cost of research and development undertaken for developing the solar plant during the past three years B. The annual depreciation charge C. Dividend payments D. Tax savings resulting from the depreciation charges E. None of the above D

16. A firm owns a building with a book value of $100,000 and a market value of $300,000. If the firm uses the building for a project, then its opportunity cost, ignoring taxes, is A. $100,000. B. $200,000.

C. $300,000. D. $400,000. E. None of the above C

17. For project A in year 2, inventories increase by $15,000 and accounts payable decrease by $2,000. Accounts receivable remain the same. Calculate the increase or decrease in net working capital for year 2. A. Decreases by $13,000 B. Increases by $13,000 C. Decreases by $17,000 D. Increases by $17,000 E. None of the above D

17000

18. The change in a firm's retained earnings is A. the difference between the net income earned and the dividends paid during a year. B. the difference between the market price of the stock and the book value. C. the amount of cash that the firm has saved up. D. the amount of directly contributed equity capital in excess of par value. E. None of the above A

19. A firm has $150 million in current liabilities, $350 million in long-term debt, $650 million in stockholders' equity, and total assets of $1150 million. Calculate the firm's ratio of long-term debt to long-term debt plus equity. A. 35 percent B. 20 percent C. 50 percent D. 17 percent

E. None of the above A

0.35

20. You would like to have enough money saved to receive $70000 per year in perpetuity after retirement for you and your heirs. How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start one year from the date of your retirement. The annual interest rate is 4 percent.) A. $7,000,000 B. $1,750,000 C. $1,000,000 D. $70,000 E. None of the above B

1750000...