Selected practice questions from Chapters 6 8, FIN 335, with Dr !

raham
From Chapter 6 "onds and "ond #alue 1. The stated interest payment, in dollars, made on a bond each period is called the bond's: A) Coupon. B) Face value. C) Maturity. ) !ield to maturity. ") Coupon rate. Ans#er: A $. The principal amount o% a bond that is repaid at the end o% the loan term is called the bond's: A) Coupon. B) Face value. C) Maturity. ) !ield to maturity. ") Coupon rate. Ans#er: B &. The rate o% return re'uired by investors in the mar(et %or o#nin) a bond is called the: A) Coupon. B) Face value. C) Maturity. ) !ield to maturity. ") Coupon rate. Ans#er: *. The annual coupon o% a bond divided by its %ace value is called the bond's: A) Coupon. B) Face value. C) Maturity. ) !ield to maturity. ") Coupon rate. Ans#er: " +. A bond #ith a %ace value o% ,1,--- that sells %or less than ,1,--- in the mar(et is called a: A) .ar bond. B) iscount bond. C) .remium bond. ) /ero coupon bond. ") Floatin) rate bond. Ans#er: B 0. A bond #ith a %ace value o% ,1,--- that sells %or more than ,1,--- in the mar(et is called a: A) .ar bond. B) iscount bond. C) .remium bond. ) /ero coupon bond. ") Floatin) rate bond. Ans#er: C

1. The lon)2term bonds issued by the 3nited 4tates )overnment are called: A) Treasury bonds. B) Municipal bonds. C) Floatin) rate bonds. ) 5un( bonds. ") /ero coupon bonds. Ans#er: A 6. A bond that ma(es no coupon payments 7and thus is initially priced at a deep discount to par value) is called a 8888888 bond. A) Treasury B) municipal C) %loatin) rate ) 9un( ") :ero coupon Ans#er: " ;. A bond #hich, at the election o% the holder, can be s#apped %or a %i<ed number o% shares o% common stoc( at any time prior to the bond's maturity is called a 8888888888888 bond. A) :ero coupon B) callable C) putable ) convertible ") #arrant Ans#er: 1-. The annual coupon payment o% a bond divided by its mar(et price is called the: A) Coupon rate. B) Current yield. C) !ield to maturity. ) Bid2as( spread. ") Capital )ains yield. Ans#er: B 11. The price a dealer is #illin) to accept %or sellin) a security to an investor is called the: A) "'uilibrium price. B) Auction price. C) Bid price. ) As( price. ") Bid2as( spread. Ans#er: 1$. A bond #ith a %ace value o% ,1,--- has annual coupon payments o% ,1-- and #as issued 1- years a)o. The bond currently sells %or ,1,--- and has 6 years remainin) to maturity. This bond's 88888888888888 must be 1-=. >. yield to maturity >>. mar(et premium >>>. coupon rate A) > only B) > and >> only C) >>> only ) > and >>> only ") >, >> and >>>

Ans#er:

1&. >% you divide a bond's annual coupon payment by its current yield you )et the 88888888888. A) yield to maturity B) investors' re'uired rate o% return C) annual coupon rate ) cost o% capital ") bond price Ans#er: " 1*. ?hich o% the %ollo#in) statements re)ardin) bond pricin) is true@ A) The lo#er the discount rate, the more valuable the coupon payments are today. B) Bonds #ith hi)h coupon payments are )enerally 7all else the same) more sensitive to chan)es in interest rates than bonds #ith lo#er coupon payments. C) ?hen mar(et interest rates rise, bond prices #ill also rise, all else the same. ) Bonds #ith short maturities are )enerally 7all else the same) more sensitive to chan)es in interest rates than bonds #ith lon)er maturities. ") All else the same, bonds #ith lar)er coupon payments #ill have a lo#er price today. Ans#er: A 1+. !our bro(er o%%ers you the opportunity to purchase a bond #ith coupon payments o% ,;- per year and a %ace value o% ,1---. >% the yield to maturity on similar bonds is 6=, this bond should: A) 4ell %or the same price as the similar bond re)ardless o% their respective maturities. B) 4ell at a premium. C) 4ell at a discount. ) 4ell %or either a premium or a discount but it's impossible to tell #hich. ") 4ell %or par value. Ans#er: B 10. ?hen pricin) bonds, i% a bond's coupon rate is less than the re'uired rate o% return, then: A) The holder o% the bond is assured o% a pro%it re)ardless o% #hen the bond is eventually sold. B) The holder o% the bond #ill reali:e a capital )ain i% the bond is held to maturity. C) The bond sells at par because the re'uired rate o% return is ad9usted to re%lect the discrepancy. ) The bond sells at a premium i% it has a lon) maturity and at a discount i% it has a short maturity. ") The bond sells at a discount i% it has a lon) maturity and at a premium i% it has a short maturity. Ans#er: B 11. All else the same, a7n) 8888888888 #ill decrease the re'uired return on a bond. A) call provision B) lo#er bond ratin) C) sin(in) %und ) increase in in%lation ") increase in the si:e o% a bond issuance Ans#er: C 16. ?hich o% the %ollo#in) items )enerally appears in a corporate bond 'uote %rom The Wall Street Journal@ A) !ield to maturity B) Ari)inal issue price C) Current yield ) Bame o% the trustee
&

") Bond ratin) Ans#er: C

1;. For a discount bond, the current yield is 888888888 the yield to maturity, and the coupon rate is 8888888888888 the yield to maturity. A) less thanC less than B) less thanC )reater than C) )reater thanC less than ) )reater thanC )reater than ") e'ual toC e'ual to Ans#er: A $-. For a premium bond, the re'uired return is less than the: >. Current yield. >>. !ield to maturity. >>>. Coupon rate. A) B) C) ) ") > only > and >> only >> and >>> only > and >>> only >, >>, and >>>

$1. >% investors are uncertain that they #ill be able to sell a corporate bond 'uic(ly, the investors #ill demand a hi)her yield in the %orm o% a7n) 888888888888. A) in%lation premium B) li'uidity ris( premium C) interest rate ris( premium ) de%ault ris( premium ") increased real rate o% interest Ans#er: B $$. i::y Corp. bonds bearin) a coupon rate o% 1$=, pay coupons semiannually, have & years remainin) to maturity, and are currently priced at ,;*- per bond. ?hat is the yield to maturity@ A) 1$.--= B) 1&.;;= C) 1*.+*= ) 1+.$+= ") 1+.+1= Ans#er: C Desponse: ,;*- E 1--- FF, 0- .MT, 0 B, 2;*- .F, C.T >G! E 1.$1=C !TM E 1.$1= < $ E 1*.+*=

$&. ?hitesell Athletic Corporation's bonds have a %ace value o% ,1,--- and a ;= coupon paid semiannuallyC the bonds mature in 6 years. ?hat current yield #ould be reported in The Wall Street Journal i% the yield to maturity is 1=@ A) *= B) += C) 0= ) 1= ") 6= Ans#er: "

Desponse: 1--- FF, *+ .MT, 10 B, &.+ >G!, C.T .F E ,1,1$-.;*C Annual coupon is *+ < $ E ;-. Current !ield 7C!) E ,;- G 1,1$-.;* E 6.-&= $*. HI "nterprises issues bonds #ith a ,1,--- %ace value that ma(e coupon payments o% ,&- every & months. ?hat is the coupon rate@ A) -.&-= B) &.--= C) ;.--= ) 1$.--= ") &-.--= Ans#er: Desponse: coupon rate E 7,&- < *) G 1,--- E 1$=

$+. 4uppose you purchase a :ero coupon bond #ith %ace value ,1,---, maturin) in $+ years, %or ,16-. ?hat is the implicit interest, in dollars, in the %irst year o% the bond's li%e@ A) , $.60 B) , ;.6* C) ,1$.16 ) ,1;.$1 ") ,&-.-Ans#er: C 1--- FF, $+ B, 216- .F, C.T >G! E !TM E 1.1=C !ear 1 interest E ,16- < .-11 E ,1$.16 $0. 4uppose you purchase a :ero coupon bond #ith a %ace value o% ,1,--- and a maturity o% $+ years, %or ,16-. >% the yield to maturity on the bond remains unchan)ed, #hat #ill the price o% the bond be + years %rom no#@ A) ,$+&.0* B) ,$61.+$ C) ,&1-.;1 ) ,&6-.+6 ") ,+--.-Ans#er: A 1--- FF, $+ B, 216- .F, C.T >G! E 1.1=C 216- .F, + B, 1.1 >G!, C.T FF E ,$+&.0* $1. ?hat is the yield to maturity on an 162year, :ero coupon bond sellin) %or &-= o% par value@ A) *.60= B) +.60= C) 0.&1= ) 0.;$= ") &-.--= Ans#er: 1--- FF, 16 B, 2&-- .F, C.T >G! E !TM E 0.;$= $6. 5H5 "nterprises #ants to issue si<ty $-2year, ,1,--- :ero2coupon bonds. >% each bond is to yield 1=, ho# much #ill 5H5 receive 7i)norin) issuance costs) #hen the bonds are %irst sold@ A) ,11,$1$ B) ,1$,&;& C) ,1+,+-+ ) ,16,66") ,$-,--Ans#er: C $Desponse: price E ,1,--- G 1.-1 E ,$+6.*$C proceeds E ,$+6.*$ < 0- E ,1+,+-+ There is the al)ebra, but #hat are the entries usin) your TFAM (eys on your T> BA >> .lus@ And #hat o% the al)ebra and (eystro(es %or numbers $;2*- belo#@ Deco)ni:in) the al)ebra is
+

important, and e<tendin) that reco)nition to the (eystro(es is J(ey.K

$;. 5H5 "nterprises #ants to issue $-2year, ,1,--- %ace value :ero2coupon bonds. >% each bond is to yield 1=, #hat is the minimum number o% bonds 5H5 must sell i% they #ish to raise ,+ million %rom the sale@ 7>)nore issuance costs.) A) 11,$;B) 1;,&*; C) $-,10* ) $&,66") $0,1+; Ans#er: B Desponse: price E ,1,--- G 1.-1$- E ,$+6.*$C L o% bonds E ,+,---,--- G $+6.*$ E 1;,&*; &-. ?hat is the mar(et value o% a bond that #ill pay a total o% %i%ty semiannual coupons o% ,6- each over the remainder o% its li%e@ Assume the bond has a ,1,--- %ace value and a 1$= yield to maturity. A) , 1&*.60 B) , ;*$.$0 C) ,1,1&+.;) ,1,&1+.$* ") ,1,+*+.0$ Ans#er: +- B, 6- .MT, 1--- FF, 1$G$ E >G!, C.T .F E 21,&1+ &1. 5H5 Manu%acturin) 9ust issued a bond #ith a ,1,--- %ace and a coupon rate o% 6=. The bond has a li%e o% $- years, annual coupons, and a yield to maturity is 1.+=, #hat #ill the bond sell %or@ A) , ;1+ B) ,1,-$C) ,1,-+1 ) ,1,-61 ") ,1,10$ Ans#er: C 1--- FF, 6- .MT, $- B, 1.+ >G!, C.T .F E 21,-+1 &$. 5H5 Manu%acturin) 9ust issued a bond #ith a ,1,--- %ace value and a coupon rate o% 6=. >% the bond has a li%e o% $- years, pays annual coupons, and the yield to maturity is 1.+=, #hat percent o% the bond's total price is represented by the present value o% the coupons@ A) *+.1= B) +0.1= C) 11.0= ) ;&.$= ") 1--.-= Ans#er: C Desponse: 3sin) the TFAM (eystro(es above, you )et the price o% around ,1,-+1. Bo#, in this problem, you must calculate the value o% the annuity stream 7the interest payments or coupons) and divide that into the bond price. Decall that the total bond value is comprised o% the .F o% the coupons plus the .F o% the maturity payo%% o% ,1---. Meystro(es %or the .F o% the coupons@ 6- .MT, 1.+ >G!, $- B, C.T .F E 261+.+0. ivide that into 1-+1 and you )et ,61+.+0 G 1,-+-.;1 E 11.0=.

&&. 5H5 Manu%acturin) 9ust issued a bond #ith a ,1,--- %ace value and a coupon rate o% 6=. >% the bond has a li%e o% $- years, pays annual coupons, and the yield to maturity is 1.+=, #hat is the present value o% the bond's %ace value@ A) , $&+.*1 B) , &*1.1+ C) , 61+.+0 ) ,1,---.-") ,1,-+-.;1 $Ans#er: A, Desponse: .F o% par E ,1,--- G 1.-1+ E ,$&+.*1 71--- FF, $- B, 1.+ >G!, C.T .F E $&+.*1) &*. 5H5 Manu%acturin) 9ust issued a bond #ith a ,1,--- %ace value and a coupon rate o% 6=. >% the bond has a li%e o% $- years, pays annual coupons, and the yield to maturity is 1.+=, #hat is the total present value o% the bond's coupon payments@ A) , $&+.*1 B) , &*1.1+ C) , 61+.+0 ) ,1,---.-") ,1,-+-.;1 Ans#er: C $Desponse: .F o% coupons E ,6- N71 1G1.-1+ )G .-1+O E ,61+.+0 3sin) the TFAM (eys instead o% al)ebra@ Coupon payments are 6= o% ,1--- or ,6-. 4o, 6- .MT, $- B, 1.+>G!, C.T .F E 61+.+0 &+. The mar(et price o% a bond is ,1,$&0.;*, it has 1* years to maturity, a ,1,--- %ace value, and pays an annual coupon o% ,1-- in semiannual installments. ?hat is the yield to maturity@ A) &.16= B) *.$0= C) +.&1= ) 0.11= ") 1.$1= Ans#er: " Desponse: $6 $6 ,1,$&0.;* E ,+- PN1 2 1G71 Q D) O G DR Q 1,--- G 71 Q D) C D E &.0&1=C !TM E &.0*= < $ E 1.$1= The al)ebra is a bit annoyin), so do the TFAM stu%%, thusly: 21,$&0.;*.F, 1--- FF, $6 B, +.MT, C.T >G! E &.0&1. >G! < $ E &.0&1 < $ E 1.$1* or 1.$1= &0. ?hat #ould you pay %or a bond that pays an annual coupon o% ,*+, has a %ace value o% ,1,---, matures in 11 years, and has a yield to maturity o% 1-=@ A) ,0*$.11 B) ,11+.&* C) ,6--.16 ) ,;1-.1* ") ,;10.&6 Ans#er: A 11) 11 Desponse: price E ,*+ N71 2 1G1.1 G .1O Q 1,--- G 1.1 E ,0*$.11 TFAM stu%%@ 1--- FF, *+ .MT, 11 B, 1- >G!, C.T .F E 20*$.11

&1.

Min) Boodles' bonds have a ;= coupon rate. >nterest is paid 'uarterly and the bonds have a maturity o% 1- years. >% the appropriate discount rate is 1-= on similar bonds, #hat is the price o% Min) Boodles' bonds@ A) ,;&1.$* B) ,;&6.++ C) ,;11.$1 ) ,;6;.0& ") ,;;1.$1 Ans#er: A 1--- FF, ;-G* E $$.+ .MT, 1- < * E *- B, 1-G*E$.+ >G!, C.T .F E 2;&1.$*

&6. Cornerstone >ndustries has a bond outstandin) #ith an 6= coupon rate and a mar(et price o% ,61*.06. >% the bond matures in 0 years and interest is paid semiannually, #hat is the !TM@ A) *.;= B) 0.;= C) 6.;= ) 1-.;= ") 1$.;= Ans#er: 1$ 1$ Desponse: ,61*.06 E ,*- PN1 2 1G71 Q D) O G DR Q 1,--- G 71 Q D) C D E +.*+=C !TM E +.*+= < $ E 1-.;= TFAM (eystro(es@ *- .MT, 1$ B, 1--- FF, 261*.06 .F, C.T >G! E +.*+ < $ E !TM E 1-.;= &;. The ma(e2believe bonds o% Faceboo( carry a 1$= annual coupon, have a ,1,--- %ace value, and mature in + years. Bonds o% e'uivalent ris( yield ;=. ?hat is the mar(et value o% Faceboo( bonds@ A) ,1,-11.$B) ,1,-61.$+ C) ,1,-;+.00 ) ,1,110.0; ") ,1,10-.$+ Ans#er: + + Desponse: price E ,1$- N71 2 1G1.-; ) G .-;O Q 1,--- G 1.-; E ,1,110.0; 1--- FF, 1$- .MT, + B, ; >G!, C.T .F E 21,110.0; *-. >% the %ollo#in) bonds are identical e<cept %or coupon, #hat is the price o% bond B@ F a c e v a lu e 4 e m ia n n u a l C o u p o n ! e a rs to m a tu rity . ric e A) , ;**.+6 B) , ;1+.&1 C) ,1,-&1.60 ) ,1,1+-.-") ,1,$1;.*1 Ans#er: A Desponse: ++Bond A: ,1,1+- E ,+- PN1 2 1G71 Q D) OG DR Q 1,--- G 71 Q D) C D E *.$1=C ++Bond B: price E ,*- N71 2 1G1.-*$1 ) G .-*$1O Q 1,--- G 1.-*$1 E ,;**.+6 First, compute the !TM %or bond A, thusly:
;

B ond A , 1 ,- - ,+$+ , 1 ,1 + - .- -

B ond B , 1 ,- - ,*$+ @

1--- FF, $+<$EB, +- .MT, 21,1+- .F, C.T >G! E !TM E *.$1. Then compute .F o% bond B: 1--- FF, *- .MT, $+<$E B, *.$1 >G!, C.T .F E 2;**.+6

*1. >% corporate bond yields are at 6.*= and you are in the &*= %ederal mar)inal income ta< brac(et, at #hat level o% municipal bond yields #ould you be indi%%erent bet#een o#nin) corporate bonds or muni bonds@ >)nore the impact o% state and local ta<es. A) +.;+= B) +.+*= C) +.-&= ) *.01= ") *.11= Ans#er: B Desponse: 6.*71 2 .&*) E +.+*= CHAPTER 6 QUESTIONS END HERE. CHAPTER 7 QUESTIONS BEGIN HERE 1. The stoc( valuation model that determines the current stoc( price as the ne<t dividend divided by the 7discount rate less the dividend )ro#th rate) is called the: A) /ero )ro#th model. B) ividend )ro#th model. C) Capital Asset .ricin) Model. ) "arnin)s capitali:ation model. Ans#er: B $. A stoc('s ne<t e<pected dividend divided by the current stoc( price is the: A) Current yield. B) Total yield. C) ividend yield. ) Capital )ains yield. ") "arnin)s yield. Ans#er: C &. The rate at #hich the stoc( price is e<pected to appreciate 7or depreciate) is the: A) Current yield. B) Total yield. C) ividend yield. ) Capital )ains yield. ") "arnin)s yield. Ans#er: *. .ayments made by a corporation to its shareholders, in the %orm o% either cash, stoc(, or payments in (ind, are called: A) Detained earnin)s. B) Bet income. C) ividends. ) Dedistributions. ") >n%used e'uity. Ans#er: C +. The mar(et in #hich ne# securities are ori)inally sold to investors is the 88888888 mar(et. A) dealer B) auction C) over2the2counter 7ATC) ) secondary ") primary Ans#er: "
11

0. The mar(et in #hich previously issued securities are traded amon) investors is the: A) ealer mar(et. B) Auction mar(et. C) Aver2the2counter 7ATC) mar(et. ) 4econdary mar(et. ") .rimary mar(et. Ans#er: 1. Common stoc( valuation re'uires, amon) other thin)s, in%ormation re)ardin) the: >. "<pected dividend )ro#th rate. >>. Current dividend payment. >>>. .ar value o% the common stoc(. A) > only B) > and >> only C) > and >>> only ) >> and >>> only ") >, >>, and >>> Ans#er: B 6. As illustrated usin) the dividend )ro#th model, the total return on a share o% common stoc( is comprised o% a 88888888888. A) capital )ains yield and a dividend )ro#th rate B) capital )ains )ro#th rate and a dividend )ro#th rate C) dividend payout ratio and a re'uired rate o% return ) dividend yield and the present dividend ") dividend yield and a capital )ains yield Ans#er: " ;. ?hich o% the %ollo#in) items #ould usually appear %or a stoc( 'uote in The Wall Street Journal@ A) Capital )ains rate B) ividend yield C) Bumber o% shares outstandin) ) .ar value o% the stoc( ") ividend )ro#th rate Ans#er: B 1-. >% dividends on a common stoc( are e<pected to )ro# at a constant rate %orever, and i% you are told the most recent dividend paid, the dividend )ro#th rate, and the appropriate discount rate today, you can calculate 88888888888. >. the price o% the stoc( today >>. the dividend that is e<pected to be paid ten years %rom no# >>>. the appropriate discount rate ten years %rom no# A) > only B) > and >> only C) > and >>> only ) >> and >>> only ") >, >>, and >>> Ans#er: B 11. ?hich o% the %ollo#in) statements re)ardin) dividend yields is true@ A) >t measures ho# much the stoc('s price #ill increase in a year. B) >t incorporates the par value o% the stoc( into the calculation. C) >t is analo)ous to the current yield %or a bond. ) >t is al#ays )reater than the stoc('s capital )ains yield. ") >t measures the total annual return an investor can e<pect to earn by o#nin) the stoc(.

Ans#er: C 1$. ?hich o% the %ollo#in) is 7are) true@ >. The dividend yield on a stoc( is the annual dividend divided by the par value. >>. ?hen the constant dividend )ro#th model holds, ) E capital )ains yield. >>>. The total return on a share o% stoc( E dividend yield Q capital )ains yield. A) > only B) >> only C) > and >> only ) >> and >>> only ") >, >>, and >>> Ans#er: 1&. >% some shareholders have )reater votin) po#er than others, it must be that: A) The company has both pre%erred stoc( and common stoc( outstandin). B) The company has outstandin) debentures. C) The company is located outside the 3nited 4tates in a ta<2haven locale. ) The company has multiple classes o% common stoc(. ") The company is in ban(ruptcy proceedin)s. Ans#er: 1*. ?hat #ould you pay %or a share o% ABC Corporation stoc( today i% the ne<t dividend #ill be ,& per share, your re'uired return on e'uity investments is 1+=, and the stoc( is e<pected to be #orth ,;- one year %rom no#@ A) ,16.$0 B) ,6-.61 C) ,6$.+0 ) ,;-.-") ,;6.1$ Ans#er: B Desponse: .- E ,& G 1.1+ Q ;- G 1.1+ E ,6-.61 1+. The dividend on 4imple Motors common stoc( #ill be ,& in 1 year, ,*.$+ in $ years, and ,0.-- in & years. !ou can sell the stoc( %or ,1-- in & years. >% you re'uire a 1$= return on your investment, ho# much #ould you be #illin) to pay %or a share o% this stoc( today@ A) ,1+.*+ B) ,11.$* C) ,61.+$ ) ,6+.00 ") ,;1.&Ans#er: C Desponse: .- E ,&.-- G 1.1$ Q *.$+ G 1.1$$ Q 1-0 G 1.1$& E ,61.+$ 10. A stoc( that pays a constant dividend o% ,1.+- %orever currently sells %or ,1-.11. ?hat is the re'uired rate o% return@ A) 1-= B) 1$= C) 1&= ) 1*= ") 1+= Ans#er: Desponse: ,1-.11 E ,1.+- G DC D E 1*=

1&

11. ABC Company's pre%erred stoc( is sellin) %or ,&- a share. >% the re'uired return is 6=, #hat #ill the dividend be t#o years %rom no#@ A) ,$.-B) ,$.$C) ,$.*) ,$.6") ,&.$+ Ans#er: C Desponse: ,&- E G .-6C E ,$.*16. ?hat #ould you pay today %or a stoc( that is e<pected to ma(e a ,$ dividend in one year i% the e<pected dividend )ro#th rate is += and you re'uire a 1$= return on your investment@ A) ,$6.+1 B) ,$;.&& C) ,&1.*& ) ,*&.1* ") ,+*.&Ans#er: A Desponse: .- E ,$ G 7.1$ 2 .-+) E ,$6.+1 1;. The stoc( o% MT! Iol% ?orld currently sells %or ,;- per share. The %irm has a constant dividend )ro#th rate o% 0= and 9ust paid a dividend o% ,+.-;. >% the re'uired rate o% return is 1$=, #hat #ill the stoc( sell %or one year %rom no#@ A) , ;-.-B) , ;&.+$ C) , ;+.*) , ;;.6") ,11$.16 Ans#er: C Desponse: .1 E .-71 Q )) E ,;- 71.-0) E ,;+.*$-. Slano's stoc( is currently sellin) %or ,*-.--. The e<pected dividend one year %rom no# is ,$ and the re'uired return is 1&=. ?hat is this %irm's dividend )ro#th rate assumin) the constant dividend )ro#th model is appropriate@ A) 6= B) ;= C) 1-= ) 11= Ans#er: A Desponse: ) E .1& 2 7,$ G *-) E 6= $1. The current price o% T!/ stoc( is ,6-.--. ividends are e<pected to )ro# at += inde%initely and the most recent dividend #as ,$.1+. ?hat is the re'uired rate o% return on T!/ stoc(@ A) 1.&= B) 6.1= C) ;.+= ) 1-.0= ") 11.$= Ans#er: B Desponse: D E 7,$.6; G 6-) Q .-+ E 6.1=

$$. ABC Corporation's common stoc( dividend yield is &.01=, it 9ust paid a dividend o% ,$.1+, and is e<pected to pay a dividend o% ,$.6; one year %rom no#. ividends are e<pected to )ro# at a constant rate inde%initely. ?hat is the re'uired rate o% return on ABC stoc(@ A) 1.&= B) 6.1= C) ;.+= ) 1-.0= ") 11.$= Ans#er: B Desponse: 7,$.6; 2 $.1+) G $.1+ E .-+1C D E .-&0 Q .-+1 E 6.1= $&. >% Bi) Amp, >nc. stoc( closed at ,&0 and the current 'uarterly dividend is ,-.1+ per share, #hat dividend yield #ould be reported %or the stoc( in The Wall Street Journal@ A) $.-= B) &.0= C) +.1= ) 0.0= ") 6.&= Ans#er: " Desponse: ! E 7,-.1+ < *) G &0 E 6.&= $*. 4uppose BoIro, >nc. has 9ust issued a dividend o% ,&.$+ per share. 4ubse'uent dividends #ill remain at ,&.$+ inde%initely. Deturns on the stoc( o% %irms li(e BoIro are currently runnin) 1-=. ?hat is the value o% one share o% stoc(@ A) ,$$.+B) ,$1.$+ C) ,&$.+) ,&1.$+ ") ,&;.1+ Ans#er: C Desponse: . E ,&.$+ G .1- E ,&$.+$+. 4uppose .ale Uose, >nc. has 9ust paid a dividend o% ,1.6- per share. 4ales and pro%its %or .ale Uose are e<pected to )ro# at a rate o% 6= per year. >ts dividend is e<pected to )ro# by the same amount. >% the re'uired return is 1*=, #hat is the value o% a share o% .ale Uose@ A) ,16.-B) ,$+.$C) ,$1.6) ,&-.0") ,&$.*Ans#er: " Desponse: . E N,1.6-71.-6)O G 7.1* 2 .-6) E ,&$.*$0. 4uppose that you have 9ust purchased a share o% stoc( %or ,*-. The most recent dividend #as ,$ and dividends are e<pected to )ro# at a rate o% 1= inde%initely. ?hat must your re'uired return be on the stoc(@ A) +.*+= B) 1.--= C) 1-.$+= ) 1$.&+= ") 1&.0+= Ans#er: Desponse: D E N,$71.-1)O G *- Q 2 .-1 E 1$.&+=
1+

$1. The pre%erred stoc( o% the Simbau)h >nstitute pays a constant annual dividend o% ,* and sells %or ,+-. !ou believe the stoc( #ill sell %or ,&$ in one year. !ou must, there%ore, believe that the re'uired return on the stoc( #ill be 88888 percenta)e points 88888888 in one year. A) 6C hi)her B) 6C lo#er C) 1.+C hi)her ) $.+C lo#er ") *.+C hi)her Ans#er: " Desponse: current: ,+- E ,* G DC D E 6=C %uture: ,&$ E ,* G DC D E 1$.+ $6. A %irm's stoc( has a re'uired return o% 1$=. The stoc('s dividend yield is +=. ?hat is the dividend the %irm is e<pected to pay in one year i% the current stoc( price is ,+-@ A) ,$.-B) ,$.+C) ,&.-) ,&.+") ,*.-Ans#er: B Desponse: E ,+- 7.-+) E ,$.+1 $;. A %irm's stoc( has a re'uired return o% 1$=. The stoc('s dividend yield is +=. ?hat dividend did the %irm 9ust pay i% the current stoc( price is ,+-@ A) ,$.16 B) ,$.&* C) ,$.+) ,$.61 ") ,&.0Ans#er: B 3se the %ollo#in) to ans#er 'uestions &-2&0:
+$ ? ee(s U i So * 6 .1 $ $ - .1 ! ld = & .& Fol 1--s $-;$+

4 to c ( u ( e " n e r) y

4ym 3 M

iv 1 .- -

." 16

U i & 1 .+ +

So $ ; .* -

C lo s e & - .$ -

C h). V .+ 0

&-.

u(e stoc( must have closed at 88888888888 per share on the previous tradin) day. A) ,$;.0* B) ,&-.10 C) ,&-.;; ) ,&1.++ ") ,&$.11 Ans#er: B Desponse: &-.10 2 -.+0 E &-.$-

&1. For the current year, the e<pected dividend per share is: A) ,-.$+ B) ,1.-C) ,$.-) ,&.&") ,*.-Ans#er: B oin) the al)ebra@ "<pected .4 E !ld < Close E .-&& < &-.$- E 1

&$. Assume the e<pected )ro#th rate in dividends is 1-=. Then the constant )ro#th model su))ests that the re'uired return on u(e stoc( is: A) 1.*= B) 6.;= C) 11.-= ) 1&.0= ") 1+.6= Ans#er: Desponse: D E N7,1.-- < 1.1-) G &-.$-O Q .1- E 1&.0= &&. Based on the 'uote, a )ood estimate o% ".4 over the last %our 'uarters is: A) ,-.6B) ,1.$1 C) ,1.06 ) ,1.;1 ") ,$.+* Ans#er: C Desponse: ".4 E ,&-.$- G 16 E ,1.06 &*. An this tradin) day, the number o% u(e shares #hich chan)ed hands #as: A) $-; B) $,-;$ C) $-,;$+ ) $-;,$+") $,-;$,+-Ans#er: " The al)ebra@ Uo# about $-,;$+ < 1-- E $,-;$,+-&+. Assume that u(e paid a ,-.;$ annual dividend in the previous period. ?hat is the dividend )ro#th rate based on this 'uote@ A) *.6= B) 0.-= C) 1.$= ) 6.1= ") ;.;= Ans#er: : Desponse: ) E 7,1.-- G -.;$) 2 1 E 6.1= &0. !ou believe that the re'uired return on u(e stoc( is 10= and that the e<pected dividend )ro#th rate is 1$=, #hich is e<pected to remain constant %or the %oreseeable %uture. >s the stoc( currently overvalued, undervalued, or %airly priced@ A) Avervalued B) 3ndervalued C) Fairly priced ) Cannot tell #ithout more in%ormation Ans#er: A Desponse: . E N,1.-- 71.1$) O G 7.10 2 .1$) E ,$6.--C overvalued at ,&-.$- in the mar(et CHAPTER 7 QUESTIONS END HERE

11

CHAPTER 8 QUESTIONS BEGIN HERE 1. The di%%erence bet#een the mar(et value o% an investment and its cost is the: A) Bet present value. B) >nternal rate o% return. C) .aybac( period. ) .ro%itability inde<. ") iscounted paybac( period. Ans#er: A $. The net present value 7B.F) rule can be best stated as: A) An investment should be accepted i%, and only i%, the B.F is e<actly e'ual to :ero. B) An investment should be re9ected i% the B.F is positive and accepted i% it is ne)ative. C) An investment should be accepted i% the B.F is positive and re9ected i% its is ne)ative. ) An investment #ith )reater cash in%lo#s than cash out%lo#s, re)ardless o% #hen the cash %lo#s occur, #ill al#ays have a positive B.F and there%ore should al#ays be accepted. Ans#er: C &. The len)th o% time re'uired %or an investment to )enerate cash %lo#s su%%icient to recover its initial cost is the: A) Bet present value. B) >nternal rate o% return. C) .aybac( period. ) .ro%itability inde<. ") iscounted paybac( period. Ans#er: C *. The paybac( rule can be best stated as: A) An investment is acceptable i% its calculated paybac( period is less than some prespeci%ied number o% years. B) An investment should be accepted i% the paybac( is positive and re9ected i% it is ne)ative. C) An investment should be re9ected i% the paybac( is positive and accepted i% it is ne)ative. ) An investment is acceptable i% its calculated paybac( period is )reater than some prespeci%ied number o% years. Ans#er: A +. The discount rate that ma(es the net present value o% an investment e<actly e'ual to :ero is the: A) .aybac( period. B) >nternal rate o% return. C) Avera)e accountin) return. ) .ro%itability inde<. ") iscounted paybac( period. Ans#er: B 0. The internal rate o% return 7>DD) rule can be best stated as: A) An investment is acceptable i% its >DD is e<actly e'ual to its net present value 7B.F). B) An investment is acceptable i% its >DD is e<actly e'ual to :ero. C) An investment is acceptable i% its >DD is less than the re'uired return, else it should be re9ected. ) An investment is acceptable i% its >DD e<ceeds the re'uired return, else it should be re9ected. Ans#er:

1.A situation in #hich ta(in) one investment prevents the ta(in) o% another is called: A) Bet present value pro%ilin). B) Aperational ambi)uity. C) Mutually e<clusive investment decisions. ) >ssues o% scale. ") Multiple rates o% return. Ans#er: C 6. The present value o% an investment's %uture cash %lo#s divided by its intial cost is the: A) Bet present value. B) >nternal rate o% return. C) Avera)e accountin) return. ) .ro%itability inde<. ") .aybac( period. Ans#er: ;. The pro%itability inde< 7.>) rule can be best stated as: A) An investment is acceptable i% its .> is )reater than one. B) An investment is acceptable i% its .> is less than one. C) An investment is acceptable i% its .> is )reater than the internal rate o% return 7>DD). ) An investment is acceptable i% its .> is less than the net present value 1-. ?hich o% the %ollo#in) statements is true@ A) B.F should never be used i% the pro9ect under consideration has nonconventional cash %lo#s. B) B.F is similar to a costGbene%it ratio. C) >% the %inancial mana)er relies on B.F in ma(in) capital bud)etin) decisions, she acts in the shareholders' best interests. ) B.F can normally be directly observed in the mar(etplace. ") >DD is )enerally pre%erred to B.F in ma(in) correct capital bud)etin) acceptance decisions. Ans#er: C 11. Bet present value 8888888888888. A) is e'ual to the initial investment in a pro9ect B) is e'ual to the present value o% the pro9ect bene%its C) is e'ual to :ero #hen the discount rate used is e'ual to the >DD ) is simpli%ied by the %act that %uture cash %lo#s are easy to estimate ") re'uires the %irm set an arbitrary cuto%% point %or determinin) #hether an investment is acceptable Ans#er: C 1$. The 8888888 decision rule is considered the WbestW in principle. A) internal rate o% return B) paybac( period C) avera)e accountin) return ) net present value ") pro%itability inde< Ans#er: 1&. ?hich o% the %ollo#in) decision rules is best %or evaluatin) pro9ects %or #hich cash %lo#s beyond a speci%ied point in time, and the time value o% money, can both be i)nored@ A) .aybac( B) Bet present value C) Avera)e accountin) return ) .ro%itability inde< ") >nternal rate o% return Ans#er: A
1;

1*. An investment )enerates ,1.1- in present value bene%its %or each dollar o% invested costs. This conclusion #as most li(ely reached by calculatin) the pro9ect's: A) Bet present value B) .ro%itability inde< C) >nternal rate o% return ) .aybac( period ") Avera)e accountin) return Ans#er: B 1+. The use o% #hich o% the %ollo#in) #ould lead to correct decisions #hen comparin) mutually e<clusive investments@ >. .ro%itability inde< >>. Bet present value >>>. Avera)e accountin) return A) > only B) >> only C) >>> only ) > and >> only ") > and >>> only Ans#er: B 10. !ou o#n some manu%acturin) e'uipment that must be replaced. T#o di%%erent suppliers present a purchase and installation plan %or your consideration. This is an e<ample o% a business decision involvin) 8888888888888 pro9ects. A) mutually e<clusive B) independent C) #or(in) capital ) positive B.F ") crossover Ans#er: A 11. >% a pro9ect #ith conventional cash %lo#s has an >DD less than the re'uired return, then: A) The pro%itability inde< is less than one. B) The >DD must be :ero. C) The AAD is )reater than the re'uired return. ) The paybac( period is less than the ma<imum acceptable period. ") The B.F is positive. Ans#er: A 16. Calculate the B.F o% the %ollo#in) pro9ect usin) a discount rate o% 1-=: !r - E V,6--C !r 1 E V,6-C !r $ E ,1--C !r & E ,&--C !r * E ,+--C !r + E ,+-A) , 6.-* B) , 61.$6 C) ,$-6.-* ) ,*+;.11 ") ,661.$6 Ans#er: B $ & * + Desponse: B.F E 2,6-- 2 6- G 1.1 Q 1-- G 1.1 Q &-- G 1.1 Q +-- G 1.1 Q +-- G 1.1 E ,61.$6 3sin) your cash%lo# (eys@ CF-E 26--, CA1 E 26-, FA1E1, CA$ E 1--, FA$E1, CA& E &--, FA&E1, CA* E +--, FA*E$. Then hit the B.F (ey, type in 1- %or J>,K hit the do#n arro# to )et you bac( to the B.F display, and hit C.T and you )et 61.$6.

$1

1;.

!ou are considerin) a pro9ect that costs ,0-- and has e<pected cash %lo#s o% ,$$*, ,$+-.66 and ,$6-.;; over the ne<t three years. >% the appropriate discount rate %or the pro9ect's cash %lo#s is 1$=, #hat is the net present value o% this pro9ect@ A) The B.F is ne)ative B) , -.-C) , ;.&* ) ,*;.&* ") ,6*.1+ Ans#er: B CFA E 20--, CA1E$$*, CA$E$+-.66, CA&E$6-.;;. All the FAXs are e'ual to one, #ith each cash %lo# occurrin) once. A%ter enterin) all the Cash%lo#s 7the CA1Xs, $Xs and &Xs), hit the B.F (ey, set > e'ual to 1$, hit the do#n arro# to )et bac( to B.F, hit C.T and you )et about :ero, or B.

$-. A pro9ect costs ,&-- and has cash %lo#s o% ,1+ %or the %irst three years and ,+- in each o% the pro9ect's last three years. ?hat is the paybac( period o% the pro9ect@ A) The pro9ect never pays bac( B) &.1+ years C) *.+- years ) +.$+ years ") +.+- years Ans#er: C Desponse: recover ,$1+ in * years, need ,$+ G +- E *.+- years $1. 4uppose a pro9ect costs ,$,+-- and produces cash %lo#s o% ,*-- over each o% the %ollo#in) 6 years. ?hat is the >DD o% the pro9ect@ A) There is not enou)h in%ormationC a discount rate is re'uired B) &.$1= C) +.6*= ) ;.01= ") 1$.-0= Ans#er: C 6 Desponse: ,$,+-- E ,*-- PN1 2 1G71 Q >DD) O G >DDRC >DD E +.6*= 2$,+-- .F, *-- .MT, 6 B, C.T >G! E +.6*= Ar you could use your CF (eys Y but #ith e'ually si:ed cash%lo#s, the TFAM (eys are easier. $$. A pro9ect has an initial investment o% ,$+,---, #ith ,0,+-- annual in%lo#s %or each o% the subse'uent + years. >% the re'uired return is 1$=, #hat is the B.F@ A) V,0,+--.-B) V,$,**1.-$ C) V,1,+06.;+ ) , $1+.*0 ") ,1,10&.61 Ans#er: C + Desponse: B.F E 2,$+,--- Q 0,+-- N71 2 1G1.1$ ) G .1$O E 2,1,+06.;+ 0,+-- .MT, + B, 1$ >G!, C.T .F E $&,*&1 the present value o% your in%lo#s. !our B.F E .F7>n%lo#s) V .F 7out%lo#s) E $&,*&1 V $+,--- or a ne)ative 1,+0;.

$&. ?hat is the B.F o% the %ollo#in) set o% cash %lo#s i% the re'uired return is 1+=@
!ear C a s h F lo # V , 1 - ,- - 1 V , 1 ,- - $ , 1 - ,- - & , 1 - ,- - * V , + ,- - -

A) The B.F is ne)ative B) , *-6.$1 C) , ;+-.** ) ,1,$*1.;") ,*,0+0.1$ Ans#er: B CF- E 21---CA1 E 21--FA1 E 1 CA$ E 1---FA$ E $ CA& E 2+--> E 1+ B.F E *-6.$1 $*. ?ould you accept a pro9ect #hich is e<pected to pay ,$,+-- a year %or 0 years i% the initial investment is ,1-,--- and your re'uired return is 6=@ A) !esC the B.F is ,1,++1 B) !esC the B.F is ,;$6 C) !esC the B.F is ,0& ) BoC the B.F is V,&*0 ") BoC the B.F is V,1,$$1 Ans#er: A 0 Desponse: B.F E Q $,+--N71 2 1G1.-6 ) G .-6O E ,1,++1.$$,+-- .MT, 0 B, 6 >G!, C.T .F E 11,++1, #hich is )reater than the ,1-,--- cost by ,1,++1, so you A TU>4 "ASZZ !ou accept. $+. ?hat is the paybac( period o% a ,1+,--- investment #ith the %ollo#in) cash %lo#s@
! ear C a s h F lo # 1 , & ,- - $ , * ,- - & , + ,- - * , 0 ,- - + , 1 ,- - -

A) $.1+ years B) &.+- years C) &.1+ years ) *.+- years ") *.1+ years Ans#er: B Desponse: recover ,1$,--- in & years, need ,&,--- G 0,--- E &.+- years $0. !ou are considerin) an investment #hich has the %ollo#in) cash %lo#s. >% you re'uire a + year paybac( period, should you ta(e the investment@ !ear 1 $ & * + 0 C a s h F lo # V , & - ,- - , 1 - ,- - , + ,- - , + ,- - , 1 ,+ - , 1 - ,- - , $ - ,- - A) !es, the paybac( is &.--- years. B) !es, the paybac( is &.1+ years. C) !es, the paybac( is *.$+ years. ) Bo, the paybac( is +.$+ years. ") Bo, the paybac( is +.1+ years. Ans#er: C
$&

Desponse: recover ,$1,+-- in * years, need ,$,+-- G 1-,--- E *.$+ years $1. !our re'uired return is 1+=. 4hould you accept a pro9ect #ith the %ollo#in) cash %lo#s@ ! ear 1 $ & C a s h F lo # V,$+ ,1,1,$+ A) Bo, because the >DD is +=. B) Bo, because the >DD is 1-=. C) !es, because the >DD is $-=. ) !es, because the >DD is &-=. ") !es, because the >DD is *-=. Ans#er: $ &C Desponse: ,$+ E ,1- G 71 Q >DD) Q 1- G 71 Q >DD) Q $+ G 71 Q >DD) >DD E &-= CF-E2$+, CA1E1-, FA1E$, CA$E$+, FA$E1, >DD, C.T, >DD E $;.;1= or about &-= $6. !ou are )oin) to choose bet#een t#o investments. Both cost ,+-,---, but investment A pays ,$+,--- a year %or & years #hile investment B pays ,$-,--- a year %or * years. >% your re'uired return is 1$=, #hich should you choose@ A) A because it pays bac( sooner. B) A because its >DD e<ceeds 1$=. C) A because it has a hi)her >DD. ) B because its >DD e<ceeds 1$=. ") B because it has a hi)her B.F. Ans#er: " Desponse: & A: B.F E Q $+,--- N71 2 1G1.1$ ) G .1$O E ,1-,-*0 * B: B.F E Q $-,--- N71 2 1G1.1$ ) G .1$O E ,1-,1*1 $;. 3sin) the pro%itability inde<, #hich o% the %ollo#in) pro9ects #ould you choose i% you have limited %unds@ .ro9ect 1 $ & * + >nitial >nvestment ,+-,--1+,--0-,--*-,--;-,--B.F ,1-,--$+,--1+,--11,--*-,---

A) .ro9ect 1 B) .ro9ect $ C) .ro9ect & ) .ro9ect * ") .ro9ect + Ans#er: " Desponse: .ro9ect 1: .> E ,0-,--- G +-,--- E 1.$--C .ro9ect $: .> E ,1--,--- G 1+,--- E 1.&&& .ro9ect &: .> E ,1+,--- G 0-,--- E 1.$+-C .ro9ect *: .> E ,+1,--- G *-,--- E 1.*$+ .ro9ect +: .> E ,1&-,--- G ;-,--- E 1.***

&-.

!ou have a choice bet#een $ mutually e<clusive investments. >% you re'uire a 1+= return, #hich investment should you choose@ !ear 1 $ & A C a s h F lo # V , 1 - - ,- $ - ,- * - ,- 6 - ,- B C a s h F lo # V , 1 $ + ,- - 1 + ,- - * + ,- - * - ,- - -

A) .ro9ect A, because it has a smaller initial investment. B) .ro9ect B, because it has a hi)her B.F. C) "ither one, because they have the same pro%itability inde<es. ) .ro9ect A, because it has the hi)her internal rate o% return. ") .ro9ect B, because it pays bac( %aster. Ans#er: B Desponse: $ & A: B.F E Q $-,--- G 1.1+ Q *-,--- G 1.1+ Q 6-,--- G 1.1+ E ,$&6 $ & B: B.F E Q 1+,--- G 1.1+ Q *+,--- G 1.1+ Q *-,--- G 1.1+ E ,+*+ &1. For a pro9ect #ith an initial investment o% ,6,--- and cash in%lo#s o% ,$,--- each year %or 0 years, calculate B.F )iven a re'uired return o% 1&=. A) V,6*0 B) V,$0& C) , ) ,1*; ") ,++$ Ans#er: C 0 Desponse: B.F E 2,6,--- Q $,--- N71 2 1G1.1& ) G .1&O E ,- 7actual 2,*.;-) 3se your TFAM (eys #ith e'ually2si:ed cash %lo#s. Thusly: $--- .MT, 0 B, 1& >G!, C.T .F E 1,;;+, #hich is less than 6,---, so your B.F #ould be about a ne)ative %ive buc(s, as #ith the al)ebra above. &$. ?hat is the >DD o% an investment that costs ,16,+-- and pays ,+,$+- a year %or + years@ A) 1&= B) 1+= C) 1;= ) $+= ") $6= Ans#er: A + Desponse: ,16,+-- E ,+,$+- PN1 2 1G71 Q >DD) O G >DDRC >DD E 1$.;$= 5ust use your TFAM (eys #ith e'ual cash %lo#s to calculate >DD. Thusly: 216,+-- .F, +,$+- .MT, + B, C.T >G! E >DD #ith e'ually2si:ed cash2%lo#s or 1$.;$= &&. ?hat is the pro%itability inde< o% the %ollo#in) investment i% the re'uired return E 1-=@ ! ear 1 $ & C a s h F lo # V,1+,+,1+ ,1+ A) -.;* B) 1.-; C) 1.16 ) 1.$1 ") 1.*+ Ans#er: B
$+

& Desponse: .F E ,+- G 1.1 Q 1+ G 1.1$ Q 1+ G 1.1 E ,10&.1;C .> E ,10&.1; G 1+- E 1.-; &*. ?hat is the paybac( period %or the %ollo#in) investment@ !ear 1 $ & * C a s h F lo # V , $ + ,- - , 1 - ,- - , 6 ,- - , * ,- - , $ ,- - A) * years B) & years C) $ years ) 1 year ") The investment doesn't paybac( Ans#er: " Desponse: recover ,1-,--- Q 6,--- Q *,--- Q $,--- E ,$*,---C never pays bac( $se the followin% to answer questions 35&38' Bill plans to open a do2it2yoursel% do) bathin) center in a store%ront. The bathin) e'uipment #ill cost ,+-,---. Bill e<pects the a%ter2ta< cash in%lo#s to be ,1+,--- annually %or 6 years, a%ter #hich he plans to scrap the e'uipment and retire to the beaches o% 5amaica. &+. ?hat is the pro9ect's paybac( period@ A) $.01 years B) &.&& years C) &.01 years ) *.&& years ") +.01 years Ans#er: B Desponse: paybac( E ,+-,--- G 1+,--- E &.&& years &0. Assume the re'uired return is 1-=. ?hat is the pro9ect's B.F@ A) , 661 B) ,1&,&$$ C) ,$$,1+; ) ,&-,-$* ") ,*+,--1 Ans#er: 6 Desponse: B.F E Q 1+,--- N71 2 1G1.1- ) G .1-O E ,&-,-$&.6; 3se the CF (eys %or practice: CF-E2+-,---, CA1E1+,---, FA1E6, B.F, >E1-, B.F E &-,-$* .ractice these 'uestions usin) our BA >> .lus revie# sheet problems 162$$. &1. Assume the re'uired return is $-=. ?hat is the pro9ect's >DD@ 4hould it be accepted@ A) 1+=C yes B) 1+=C no C) $+=C yes ) $+=C no ") $-=C indi%%erent Ans#er: C 6 Desponse: ,+-,--- E ,1+,--- PN1 2 1G71 Q >DD) O G >DDRC >DD E $*.;+= [ $-=C accept 2+-,--- .F, 1+,--- .MT, 6 B, C.T >G! E >DD E $*.;+=

&6.Assume the re'uired return is $-=. ?hat is the pro9ect's .>@ 4hould it be accepted@ A) -.6+C yes B) -.6+C no C) 1.--C indi%%erent ) 1.1+C yes ") 1.1+C no Ans#er: Desponse: 6 .F o% in%lo#s E ,1+,--- N71 2 1G1.$ ) G .$O E ,+1,++1C .> E ,+1,++1 G +-,--- E 1.1+C accept At a discount rate o% $-=, the .F o% the in%lo#s e'uals the B.F o% 1,++1 plus the cost o% +-,--or +1,++1. 7Decall the .F7>n%lo#s) E B.F Q .F7Aut%lo#s))
END OF CHAPTER 8 QUESTIONS

$1