21.

The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car project except ______. (Points: 5) the consequent reduction in sales of the company's existing gasoline models ( i.e.: incidental effects) interest payment on debt the value of tools that can be transferred from the company's existing plants the expenditure on new plants and equipment 22. Money that a firm has already spent or committed to spend regardless of whether a project is taken is called ______. (Points: 5) fixed cost opportunity cost sunk cost none of the above 23. A firm has a general-purpose machine, which has a book value of $400,000 and is sold for $600,000 in the market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project? (Points: 5) $600,000 $540,000 $400,000 none of the above 24. Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two years? (Points: 5) $200,000 $170,000 $140,000 $50,000 25. Which of the following portfolios have the least risk? (Points: 5) a portfolio of Treasury bills a portfolio of long-term United States Government bonds portfolio of U.S. common stocks of small firms none of the above 26. Which portfolio had the highest average annual (real) return between 1900 and 2003? (Points: 5) a portfolio of U.S. Common stocks a portfolio of U.S. government bonds

a portfolio of Treasury bills none of the given answers 27. Spill Oil Company's stocks had -10%, 13% and 27% rates of return during the last three years respectively; calculate the average rate of return for the stock. (Points: 5) 10% per year 8% per year 12% per year none of the above 28. The portion of the risk that can be eliminated by diversification is called _____. (Points: 5) market risk unique risk interest rate risk default risk 29. The "beta" is a measure of ______. (Points: 5) unique risk total risk market risk none of the above 30. The efficient portfolios: (I) have only unique risk (II) provide highest returns for a given level of risk (III) provide the least risk for a given level of returns (IV) have no risk at all (Points: 5) I only II and III only IV only II only 31. Beta measure indicates ______. (Points: 5) the ability to diversify risk the change in the rate of return on an investment for a given change in the market return the actual return on an asset A and C

32. If the beta of Microsoft is 1.7, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft. (Points: 5) 16.6% 15.6% 13.9% 11.3% 33. The cost of capital for a project depends on ______. (Points: 5) the company's cost of capital the use to which the capital is put, i.e. the project the industry cost of capital all of the above 34. Cost of capital is the same as cost of equity for firms ______. (Points: 5) financed entirely by debt financed by both debt and equity financed entirely by equity none of the above 35. The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.) (Points: 5) 20% 17% 8.1% none of the above 36. The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.) (Points: 5) 9.2% 14% 10% none of the above 37. You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year-1. (Points: 5)

$7 $10 $13 none of the above 38. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an all-equity firm (Points: 5) I only II only III only I and III only 39. Modigliani and Miller's Proposition I states that ______. (Points: 5) the market value of any firm is independent of its capital structure the market value of a firm's debt is independent of its capital structure the market value of a firm's common stock is independent of its capital structure none of the above 40. Health and Wealth Company is financed entirely by common stock which is priced to offer a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt yielding 6%, what is the expected return on the common stock after refinancing? (Ignore taxes.) (Points: 5) 18% 21% 15% none of the above 41. The beta of an all equity firm is 1.2. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing, what will be the beta of the levered firm? The beta of debt is 0.2. (Assume no taxes.) (Points: 5) 1.2 2.2 2.4 none of the above 42. The M&M Company is financed by $4 million (market value) in debt and $6 million (market value) in equity. The cost of debt is 5% and the cost of equity is 10%. Calculate the weighted average cost of capital. (Assume no taxes.) (Points: 5)

10% 15% 8% none of the above 43. Minimizing the weighted average cost of capital (WACC) is the same as ______. (Points: 5) maximizing the market value of the firm maximizing the book value of the firm maximizing the profits of the firm maximizing the liquidating value of the firm 44. The reason that MM Proposition I does not hold good in the presence of corporate taxes is because ______. (Points: 5) levered firms pay lower taxes when compared with identical unlevered firms bondholders require higher rates of return compared with stockholders earnings per share are no longer relevant with taxes dividends are no longer relevant with taxes 45. The trade-off theory of capital structure predicts that _____. (Points: 5) unprofitable firms should borrow more than profitable ones safe firms should borrow more than risky ones rapidly growing firms should borrow more than mature firms increasing leverage increases firm value 46. The Cambridge Company is unlevered with assets of $30 million and EBIT of $6 million. If the firm's tax rate is 34%, calculate its after-tax cash flow. (Points: 5) $2.40 million $2.04 million $3.96 million $10.20 million 47. The Boston Company has total assets of $30 million, of which $10 million are financed by debt and $20 million by equity. The EBIT is $6 million. If the firm's tax rate is 34%, and the interest rate on debt is 10%, calculate it's after tax cash flow. (Points: 5) $3.96 million $3.30 million $2.04 million $1.70 million

48. The MM Corp. is planning construction of a new warehouse for its single manufacturing plant. The initial cost of the investment is $100,000. Efficiencies from the new facility are expected to reduce after-tax costs by $20,000 for each of the next 10 years. The corporation has a total value of $6 million and has outstanding debt of $4 million. What is the NPV of the project if the firm has a before-tax cost of debt of 9% and a cost equity of 15%? Tax rate = 35% (Approximately) (Points: 5) $34,200 $28,920 $13,000 none of the above 49. The value of a business is given by ______. (Points: 5) PV = PV(free cash flows) PV = PV(free cash flows) + PV (horizon value) PV(free cash flows) PV(horizon value) none of the above 50. If a Big Mac costs $2.90 in the USA and in Japan 250 Yens, according to PPP, what is the implied exchange rate in Yens/US$? (Points: 5) 106 86.2069 125 none of the above 51. The spot rate = US$0.65/A$; the one year forward rate = US$0.60/A$. A US exporter denominates its exports to Australia in A$ and expects to receive A$ 600,000 in one year. What will the value of these exports in one year in US$ given that the firm executes a forward hedge? (Ignore transaction costs) (Points: 5) US$390,000 US$354,545 US$360,000 none of the above 52. Large business combinations in Japan are normally carried out through reciprocal ownership of common stock. These networks, or keiretsu, involve a large number of diversified companies centered around a large bank, industrial firm, or trading firm. One of the main benefits of this structure is argued to be _______. (Points: 5) the monopolistic control of economic segments the reduction of financial distress costs large scale diversification that cannot be done by individual shareholders greater efficiency in management because the management skills are homogeneous even for

53. A firm whose only assets are controlling blocks of shares are called ______. (Points: 5) a conglomerate a holding company a pyramid dual-class company 54. Conglomerates can be effective in ______. (Points: 5) the U.S.A. Great Britain developing economies none of the above 55. The United States has a market-based financial system because ______. (I) it has a large stock market (II) it has a large corporate bond market (III) it has financial institutions (Points: 5) I only II only III only I and II only