Question 1

2 out of 2 points
The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call
option with a strike price of $55 sells for $7.20. What is the value of a put option,
assuming the same strike price and expiration date as for the call option?
Answer
Selected Answer:
$9.00
Correct Answer:
$9.00

Question 2
2 out of 2 points
Suppose you believe that Basso Inc.'s stock price is going to increase from its current
level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month
call option giving you the right to buy 1 share at a price of $25 per share. If you buy this
option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax
net profit be?
Answer
Selected Answer:
$16.90
Correct Answer:
$16.90

Question 3
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

An option holder is not entitled to receive dividends unless he or she

exercises their option before the stock goes ex dividend.
An option holder is not entitled to receive dividends unless he or she
exercises their option before the stock goes ex dividend.

 Question 4
2 out of 2 points
An investor who writes standard call options against stock held in his or her portfolio is
said to be selling what type of options?
Answer
Selected Answer:
Covered
Correct Answer:
Covered

Question 5
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Call options generally sell at prices above their exercise value, but for an
in-the-money option, the greater the exercise value in relation to the strike
price, the lower the premium on the option is likely to be.
Call options generally sell at prices above their exercise value, but for an
in-the-money option, the greater the exercise value in relation to the strike
price, the lower the premium on the option is likely to be.

Question 6
2 out of 2 points
Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in
three months with a strike price of $20 sell for $1.50. Which of the following will occur
if the stock price increases 10%, to $22 a share?
Answer
Selected
Answer:
Correct
Answer:

The price of the call option will increase by less than $2, but the
percentage increase in price will be more than 10%.
The price of the call option will increase by less than $2, but the
percentage increase in price will be more than 10%.

 Question 7
2 out of 2 points
Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an
$8.50 annual dividend. If the company were to sell a new preferred issue, it would incur
a flotation cost of 4.00% of the price paid by investors. What is the company's cost of
preferred stock for use in calculating the WACC?
Answer
Selected Answer:
9.08%
Correct Answer:
9.08%

Question 8
2 out of 2 points
For a typical firm, which of the following sequences is CORRECT? All rates are after
taxes, and assume that the firm operates at its target capital structure.
Answer
Selected Answer:
re > rs > WACC > rd.
Correct Answer:
re > rs > WACC > rd.

Question 9
2 out of 2 points
Which of the following is NOT a capital component when calculating the weighted
average cost of capital (WACC) for use in capital budgeting?
Answer
Selected Answer:
Accounts payable.
Correct Answer:
Accounts payable.

Question 10

2 out of 2 points
Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is
the firm's cost of common from reinvested earnings based on the CAPM?
Answer
Selected Answer:
11.30%
Correct Answer:
11.30%

Question 11
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

If a company's tax rate increases, then, all else equal, its weighted
average cost of capital will decline.
If a company's tax rate increases, then, all else equal, its weighted
average cost of capital will decline.

Question 12
2 out of 2 points
You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her
estimate the cost of capital. You have been provided with the following data: rRF =
4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of
common from reinvested earnings?
Answer
Selected Answer:
10.93%
Correct Answer:
10.93%

Question 13
2 out of 2 points

Projects S and L are both normal projects with an initial cost of $10,000, followed by a
series of positive cash inflows. Project S's undiscounted net cash flows total $20,000,
while L's total undiscounted flows are $30,000. At a WACC of 10%, the two projects
have identical NPVs. Which project's NPV is more sensitive to changes in the WACC?
Answer
Selected Answer:
Project L.
Correct Answer:
Project L.

Question 14
2 out of 2 points
Assume a project has normal cash flows. All else equal, which of the following
statements is CORRECT?
Answer
Selected Answer:
A project's NPV increases as the WACC declines.
Correct Answer:
A project's NPV increases as the WACC declines.

Question 15
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Question 16
2 out of 2 points

The regular payback is useful as an indicator of a project's liquidity

because it gives managers an idea of how long it will take to recover the
funds invested in a project.
The regular payback is useful as an indicator of a project's liquidity
because it gives managers an idea of how long it will take to recover the
funds invested in a project.

Which of the following statements is CORRECT?

Answer
Selected
Answer:
Correct
Answer:

One defect of the IRR method versus the NPV is that the IRR does not
take proper account of differences in the sizes of projects.
One defect of the IRR method versus the NPV is that the IRR does not
take proper account of differences in the sizes of projects.

Question 17
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Multiple IRRs can exist, but not multiple MIRRs. This is one reason
some people favor the MIRR over the regular IRR.
Multiple IRRs can exist, but not multiple MIRRs. This is one reason
some people favor the MIRR over the regular IRR.

Question 18
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Question 19
2 out of 2 points

One reason some people prefer the MIRR to the regular IRR is that the
MIRR is based on a generally more reasonable reinvestment rate
assumption.
One reason some people prefer the MIRR to the regular IRR is that the
MIRR is based on a generally more reasonable reinvestment rate
assumption.

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

A sunk cost is a cost that was incurred and expensed in the past and
cannot be recovered if the firm decides not to go forward with the
project.
A sunk cost is a cost that was incurred and expensed in the past and
cannot be recovered if the firm decides not to go forward with the
project.

Question 20
2 out of 2 points
Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8%
for below-average risk projects, 10% for average-risk projects, and 12% for aboveaverage risk projects. Which of the following independent projects should Puckett
accept, assuming that the company uses the NPV method when choosing projects?
Answer
Selected Answer:
Project B, which has below-average risk and an IRR = 8.5%.
Correct Answer:
Project B, which has below-average risk and an IRR = 8.5%.

Question 21
2 out of 2 points
Which one of the following would NOT result in incremental cash flows and thus should
NOT be included in the capital budgeting analysis for a new product?
Answer
Selected
Answer:

Correct
Answer:

The cost of a study relating to the market for the new product that was
completed last year. The results of this research were positive, and they led
to the tentative decision to go ahead with the new product. The cost of the
research was incurred and expensed for tax purposes last year.
The cost of a study relating to the market for the new product that was
completed last year. The results of this research were positive, and they led
to the tentative decision to go ahead with the new product. The cost of the

research was incurred and expensed for tax purposes last year.

Question 22
2 out of 2 points
Collins Inc. is investigating whether to develop a new product. In evaluating whether to
go ahead with the project, which of the following items should NOT be explicitly
considered when cash flows are estimated?
Answer
Selected
Answer:

Correct
Answer:

The company has spent and expensed for tax purposes $3 million on
research related to the new detergent. These funds cannot be recovered,
but the research may benefit other projects that might be proposed in the
future.
The company has spent and expensed for tax purposes $3 million on
research related to the new detergent. These funds cannot be recovered,
but the research may benefit other projects that might be proposed in the
future.

Question 23
2 out of 2 points
To increase productive capacity, a company is considering a proposed new plant. Which
of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Question 24
2 out of 2 points

In calculating the project's operating cash flows, the firm should not deduct
financing costs such as interest expense, because financing costs are
accounted for by discounting at the WACC. If interest were deducted
when estimating cash flows, this would, in effect, "double count" it.
In calculating the project's operating cash flows, the firm should not deduct
financing costs such as interest expense, because financing costs are
accounted for by discounting at the WACC. If interest were deducted
when estimating cash flows, this would, in effect, "double count" it.

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If one of the assets to be used by a potential project is already owned by

the firm, and if that asset could be sold or leased to another firm if the new
project were not undertaken, then the net after-tax proceeds that could be
obtained should be charged as a cost to the project under consideration.
If one of the assets to be used by a potential project is already owned by
the firm, and if that asset could be sold or leased to another firm if the new
project were not undertaken, then the net after-tax proceeds that could be
obtained should be charged as a cost to the project under consideration.

Question 25
2 out of 2 points
The Besnier Company had $250 million of sales last year, and it had $75 million of
fixed assets that were being operated at 80% of capacity. In millions, how large could
sales have been if the company had operated at full capacity?
Answer
Selected Answer:
$312.5
Correct Answer:
$312.5

Question 26
2 out of 2 points
Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million
of sales and $100 million of fixed assets. However, its fixed assets were used at only
75% of capacity. Now the company is developing its financial forecast for the coming
year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio
at the level it would have had had it been operating at full capacity. What target
FA/Sales ratio should the company set?
Answer
Selected Answer:
30.0%
Correct Answer:
30.0%

 Question 27
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

The sustainable growth rate is the maximum achievable growth rate

without the firm having to raise external funds. In other words, it is the
growth rate at which the firm's AFN equals zero.
The sustainable growth rate is the maximum achievable growth rate
without the firm having to raise external funds. In other words, it is the
growth rate at which the firm's AFN equals zero.

Question 28
2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Firms whose fixed assets are "lumpy" frequently have excess capacity,
and this should be accounted for in the financial forecasting process.
Firms whose fixed assets are "lumpy" frequently have excess capacity,
and this should be accounted for in the financial forecasting process.

Question 29
2 out of 2 points
Which of the following assumptions is embodied in the AFN equation?
Answer
Selected Answer:
Accounts payable and accruals are tied directly to sales.
Correct Answer:
Accounts payable and accruals are tied directly to sales.

Question 30

2 out of 2 points
Which of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

Additional funds needed (AFN) are typically raised using a combination

of notes payable, long-term debt, and common stock. Such funds are nonspontaneous in the sense that they require explicit financing decisions to
obtain them.
Additional funds needed (AFN) are typically raised using a combination
of notes payable, long-term debt, and common stock. Such funds are nonspontaneous in the sense that they require explicit financing decisions to
obtain them.

Question 1
2 out of 2 points

An investor who writes standard call options against stock held in his or her portfolio is
said to be selling what type of options?
Answer
Selected Answer:

Covered
Correct Answer:

Covered

Question 2
2 out of 2 points

The current price of a stock is $22, and at the end of one year its price will be either $27
or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call
option on the stock, with an exercise price of $22, is available. Based on the binomial
model, what is the option's value? (Hint: Use daily compounding.)
Answer
Selected Answer:

$2.99
Correct Answer:

$2.99

Question 3
2 out of 2 points

Which of the following statements is most correct, holding other things constant, for
XYZ Corporation's traded call options?
Answer

Selected Answer:

The price of these call options is likely to rise if XYZ's stock price rises.
Correct Answer:

The price of these call options is likely to rise if XYZ's stock price rises.

Question 4
2 out of 2 points

Other things held constant, the value of an option depends on the stock's price, the riskfree rate, and the
Answer
Selected Answer:

All of the above.

Correct Answer:

All of the above.

Question 5
2 out of 2 points

Braddock Construction Co.'s stock is trading at $20 a share. Call options that expire in
three months with a strike price of $20 sell for $1.50. Which of the following will occur
if the stock price increases 10%, to $22 a share?
Answer
Selected
Answer:

Correct
Answer:

The price of the call option will increase by less than $2, but the percentage
increase in price will be more than 10%.
The price of the call option will increase by less than $2, but the percentage
increase in price will be more than 10%.

Question 6
2 out of 2 points

Cazden Motors' stock is trading at $30 a share. Call options on the company's stock are
also available, some with a strike price of $25 and some with a strike price of $35. Both
options expire in three months. Which of the following best describes the value of these
options?
Answer
Selected
Answer:

Correct
Answer:

If Cazden's stock price rose by $5, the exercise value of the options with
the $25 strike price would also increase by $5.
If Cazden's stock price rose by $5, the exercise value of the options with
the $25 strike price would also increase by $5.

Question 7
2 out of 2 points

As a consultant to Basso Inc., you have been provided with the following data: D1 =
$0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from

reinvested earnings based on the DCF approach?

Answer
Selected Answer:

10.44%
Correct Answer:

10.44%

Question 8
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a company assigns the same cost of capital to all of its projects regardless
of each project's risk, then the company is likely to reject some safe projects
that it actually should accept and to accept some risky projects that it should
reject.
If a company assigns the same cost of capital to all of its projects regardless
of each project's risk, then the company is likely to reject some safe projects
that it actually should accept and to accept some risky projects that it should
reject.

Question 9
2 out of 2 points

For a typical firm, which of the following sequences is CORRECT? All rates are after
taxes, and assume that the firm operates at its target capital structure.
Answer
Selected Answer:

re > rs > WACC > rd.

Correct Answer:

re > rs > WACC > rd.

Question 10
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a company's tax rate increases but the YTM on its noncallable bonds
remains the same, the after-tax cost of its debt will fall.
If a company's tax rate increases but the YTM on its noncallable bonds
remains the same, the after-tax cost of its debt will fall.

Question 11
2 out of 2 points

Which of the following is NOT a capital component when calculating the weighted

average cost of capital (WACC) for use in capital budgeting?

Answer
Selected Answer:

Accounts payable.
Correct Answer:

Accounts payable.

Question 12
2 out of 2 points

Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is
the firm's cost of common from reinvested earnings based on the CAPM?
Answer
Selected Answer:

11.30%
Correct Answer:

11.30%

Question 13
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If a project with normal cash flows has an IRR greater than the WACC, the
project must also have a positive NPV.
If a project with normal cash flows has an IRR greater than the WACC, the
project must also have a positive NPV.

Question 14
2 out of 2 points

Assume a project has normal cash flows. All else equal, which of the following
statements is CORRECT?
Answer
Selected Answer:

A project's NPV increases as the WACC declines.

Correct Answer:

A project's NPV increases as the WACC declines.

Question 15
2 out of 2 points

Which of the following statements is NOT a disadvantage of the regular payback

method?
Answer
Selected Answer:

Does not provide any indication regarding a project's liquidity or risk.

Correct Answer:

Does not provide any indication regarding a project's liquidity or risk.

Question 16
2 out of 2 points

The WACC for two mutually exclusive projects that are being considered is 12%.
Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same
NPV at the 12% current WACC. Interest rates are currently high. However, you believe
that money costs and thus your WACC will soon decline. You also think that the projects
will not be funded until the WACC has decreased, and their cash flows will not be
affected by the change in economic conditions. Under these conditions, which of the
following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

You should recommend Project R, because at the new WACC it will have
the higher NPV.
You should recommend Project R, because at the new WACC it will have
the higher NPV.

Question 17
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

If two projects have the same cost, and if their NPV profiles cross in the
upper right quadrant, then the project with the lower IRR probably has more
of its cash flows coming in the later years.
If two projects have the same cost, and if their NPV profiles cross in the
upper right quadrant, then the project with the lower IRR probably has more
of its cash flows coming in the later years.

Question 18
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

Question 19

The regular payback is useful as an indicator of a project's liquidity because

it gives managers an idea of how long it will take to recover the funds
invested in a project.
The regular payback is useful as an indicator of a project's liquidity because
it gives managers an idea of how long it will take to recover the funds
invested in a project.

2 out of 2 points

Which of the following procedures does the text say is used most frequently by
businesses when they do capital budgeting analyses?
Answer
Selected
Answer:

Correct
Answer:

DCF techniques were originally developed to value passive investments

(stocks and bonds). However, capital budgeting projects are not passive
investmentsmanagers can often take positive actions after the investment
has been made that alter the cash flow stream. Opportunities for such actions
are called real options. Real options are valuable, but this value is not captured
by conventional NPV analysis. Therefore, a project's real options must be
considered separately.
DCF techniques were originally developed to value passive investments
(stocks and bonds). However, capital budgeting projects are not passive
investmentsmanagers can often take positive actions after the investment
has been made that alter the cash flow stream. Opportunities for such actions
are called real options. Real options are valuable, but this value is not captured
by conventional NPV analysis. Therefore, a project's real options must be
considered separately.

Question 20
2 out of 2 points

To increase productive capacity, a company is considering a proposed new plant. Which

of the following statements is CORRECT?
Answer
Selected
Answer:

Correct
Answer:

In calculating the project's operating cash flows, the firm should not deduct
financing costs such as interest expense, because financing costs are
accounted for by discounting at the WACC. If interest were deducted when
estimating cash flows, this would, in effect, "double count" it.
In calculating the project's operating cash flows, the firm should not deduct
financing costs such as interest expense, because financing costs are
accounted for by discounting at the WACC. If interest were deducted when
estimating cash flows, this would, in effect, "double count" it.

Question 21
2 out of 2 points

The CFO of Cicero Industries plans to calculate a new project's NPV by estimating the
relevant cash flows for each year of the project's life (i.e., the initial investment cost, the
annual operating cash flows, and the terminal cash flow), then discounting those cash
flows at the company's overall WACC. Which one of the following factors should the
CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
Answer
Selected

Answer:

Correct
Answer:

The investment in working capital required to operate the project, even if

that investment will be recovered at the end of the project's life.
The investment in working capital required to operate the project, even if
that investment will be recovered at the end of the project's life.

Question 22
2 out of 2 points

When evaluating a new project, firms should include in the projected cash flows all of
the following EXCEPT:
Answer
Selected
Answer:

Correct
Answer:

Previous expenditures associated with a market test to determine the

feasibility of the project, provided those costs have been expensed for tax
purposes.
Previous expenditures associated with a market test to determine the
feasibility of the project, provided those costs have been expensed for tax
purposes.

Question 23
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

A sunk cost is a cost that was incurred and expensed in the past and cannot
be recovered if the firm decides not to go forward with the project.
A sunk cost is a cost that was incurred and expensed in the past and cannot
be recovered if the firm decides not to go forward with the project.

Question 24
2 out of 2 points

Which of the following rules is CORRECT for capital budgeting analysis?

Answer
Selected
Answer:

Correct
Answer:

Only incremental cash flows, which are the cash flows that would result if a
project is accepted, are relevant when making accept/reject decisions.
Only incremental cash flows, which are the cash flows that would result if a
project is accepted, are relevant when making accept/reject decisions.

Question 25
2 out of 2 points

Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed
assets that were used at 65% of capacity last year. In millions, by how much could

Baron's sales increase before it is required to increase its fixed assets?

Answer
Selected Answer:

$188.46
Correct Answer:

$188.46

Question 26
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

Firms whose fixed assets are "lumpy" frequently have excess capacity, and
this should be accounted for in the financial forecasting process.
Firms whose fixed assets are "lumpy" frequently have excess capacity, and
this should be accounted for in the financial forecasting process.

Question 27
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

A negative AFN indicates that retained earnings and spontaneous liabilities

are far more than sufficient to finance the additional assets needed.
A negative AFN indicates that retained earnings and spontaneous liabilities
are far more than sufficient to finance the additional assets needed.

Question 28
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

The first, and perhaps the most critical, step in forecasting financial
requirements is to forecast future sales.
The first, and perhaps the most critical, step in forecasting financial
requirements is to forecast future sales.

Question 29
2 out of 2 points

Last year National Aeronautics had a FA/Sales ratio of 40%, comprised of $250 million
of sales and $100 million of fixed assets. However, its fixed assets were used at only
75% of capacity. Now the company is developing its financial forecast for the coming
year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio

at the level it would have had had it been operating at full capacity. What target FA/Sales
ratio should the company set?
Answer
Selected Answer:

30.0%
Correct Answer:

30.0%

Question 30
2 out of 2 points

F. Marston, Inc. has developed a forecasting model to estimate its AFN for the upcoming
year. All else being equal, which of the following factors is most likely to lead to an
increase of the additional funds needed (AFN)?
Answer
Selected Answer:

A sharp increase in its forecasted sales.

Correct Answer:

A sharp increase in its forecasted sales.