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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

payback.

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

10%

9%

Book Value of Debt

Book Value of Equity

8,000,000

8,000,000

2,000,000

8,000,000

Market Value of Debt

Market Value of Equity

8,000,000

12,000,000

2,000,000

18,000,000

Tax Rate

Beta

40%

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

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

28%

1.62

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