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1. When does the multiple IRR problems occur?


a. When the heaviest cash flows occur at the beginning of the project


b. When the smallest cash flows occur at the beginning of the project


c. When the cost of the investment is greater than the total of all cash flows


d. When there are multiple cash flow sign changes (from negative to positive


cash flows more than once)


2. Heinrich, Inc. is considering building a new manufacturing facility on a plot of


land they bought ten years ago for $2,000,000. The land currently has a


market value of $1,500,000. What is the appropriate amount to use as the


cash outflow for the project at time zero for a project?


a. $1,500,000


b. $2,000,000


c. $500,000


d. $3,500,000


3. Airland, Airways has a debt to equity ratio of 1. Their stock investors required


12% and their bondholders require 8%. AirLamd is in the 40% tax brackets


AirLand?s weighted average cost of capital?


a. 4.8%


b. 16.8%


c. 8.4%


d. 12.6%


4. Almezxea, Ltd. is estimating its cost of equity for a new metal extractor. The


CFO suggested using the capital asset pricing model. The project?s cash flows


are being estimated for the next five years. What should Almezea use as the


risk free asset for determining the cost of equity?


a. 6 month Treasury bill


b. 1 Year Treasury bill


c. 5 year Treasury note


d. 10 year Treasury note


5. Jalisco, Inc. is estimating its cost of equity capital. Jalisco has a beta of 1.5


when the market risk premium is 8% and the risk free rate is 3.5%. What is


Jalisco?s cost of equity capital?


a. 15.50%


b. 8.00%


c. 10.25%


d. 8.75%



6. According to Modigliani and Miller without taxes (Proposition I), the change


in the value of a corporation?


a. Is not related to its capital structure


b. Is dependent upon the firms capital structure


c. Is related to its capital structure


d. B and C


7. Zuliaca Inc. has a market value of $350,000,000. Zuliaca currently has no


debt, but considering buying back shares through the issuance of


$140,000,000 in new debt. According to M&M with taxes, what would be the


value of Zuliaca AFTER the debt if their effective tax rate is 30%?


a. 42,000,000


b. 350,000,000


c. 392,000,000


d. 434,000,000


8. The NPV of a project?s cash flows determines the discount rate by setting the


present of the cash inflows equal to the value of the cash outflows.


a. True


b. False


9. If a project has a negative NPV, it most likely will not have a discounted




a. True


b. False


10. When the IRR and NPV rank two mutually exclusive projects differently, is to


choose the project with the highest NPV.


a. True


b. False


11. When we use the company?s weighted average cost of capital to determine


the NPV of a project, we are assuming the project is an average risk project.


a. True


b. False


12. A company?s capital structure is the mix of debt and equity that a company


uses to finance its assets.


a. True


b. False


13. For a company that pays taxes on pretax profits of 30%, a required return on


equity of 12% would mean an effective after-tax cost of equity of 8.4%


a. True


b. False



14. Suppose the IRR for a project is calculated to be 15% for a project when the


required rate of return is 12%, as determined by a calculation of the required


rate of return 5 years ago. Suppose the management of a company


determines from a more recent calculation that the required rate of return


should really be 13%. When the required rate of return is increased from


12% to 13%, the IRR for this project will also increase above 15%.


a. True


b. False



14. The Boston Computer Inc. is a private firm for which there is no publicly traded


stock. This firm needs to calculate the weighted average cost of capital to use in their


capital budgeting. The New England Computer Inc. has been identified as a peer


competitor in the same industry as the Boston Computer Inc. and is a public firm


with publicly traded stock. Comparative data for both companies are shown below.


Present your calculation of the WACC for Boston Computer, using the CAPM to


estimate the cost of equity. Boston Computer uses the 10-year U.S Treasury Note


securities as a proxy for the risk-free rate. A current quote of 10 year U.S Treasury


Notes is 5.5% and this is assumed to remain constant in the foreseeable future. Also,


assume the expected market risk premium is 5%.


Boston Computer


Average Yield to Maturity on Debt



New England Computer









Book Value of Debt


Book Value of Equity













Market Value of Debt


Market Value of Equity













Tax Rate








1. Calculate an estimate of BETA for Boston Computer, Inc.


2. Calculate an estimate of the WACC for Boston Computer, Inc.









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