Basic rule in capital budgeting

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TRUE/FALSE

1. "Capital" is sometimes defined as funds supplied to a firm by investors.

CIRCLE THE CORRECT ANSWER:  True  False

2. A basic rule in capital budgeting is that if two independent projects have NPVs that are greater than zero, both projects should be accepted.

CIRCLE THE CORRECT ANSWER:  True  False

3. Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt.

CIRCLE THE CORRECT ANSWER:  True  False

4. Whenever a firm borrows money, it is using financial leverage.

CIRCLE THE CORRECT ANSWER:  True  False

5. Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

CIRCLE THE CORRECT ANSWER:  True  False

6. If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

CIRCLE THE CORRECT ANSWER:  True  False

7. Diversification will normally reduce the riskiness of a portfolio of stocks.

CIRCLE THE CORRECT ANSWER:  True  False

8. Starting to invest early for retirement reduces the benefits of compound interest.

CIRCLE THE CORRECT ANSWER:  True  False

9. When considering two mutually exclusive projects, you should reject the project with the higher net present value.

CIRCLE THE CORRECT ANSWER:  True  False

MULTIPLE CHOICE (CIRCLE THE CORRECT ANSWER)

10. Which of the following statements is CORRECT?

a. If a project has "normal" cash flows, then its MIRR must be positive.

b. If a project has "normal" cash flows, then it will have exactly two real IRRs.

c. The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life.

d. If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR.

e. If a project has "normal" cash flows, then its IRR must be positive.

11. Which of the following statements is CORRECT?

a. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

b. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

c. The net present value method (NPV) is generally regarded as being the preferred method for evaluating capital investments.

d. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

e. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

12. Poff Industries' stock currently sells for $120 a share. You own 100 shares of the stock. The company is contemplating a 2-for-1 stock split. Which of the following best describes what your position will be after such a split takes place?

a. You will have 200 shares of stock, and the stock will trade at or near $60 a share.

b. You will have 100 shares of stock, and the stock will trade at or near $60 a share.

c. You will have 50 shares of stock, and the stock will trade at or near $120 a share.

d. You will have 50 shares of stock, and the stock will trade at or near $60 a share.

e. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

13. When comparing between two investment opportunities, the slides offer three possible solutions to determine which would investment provide the greatest wealth. Which of the following statements is INCORRECT?

a. Highest rate of return: Effective Annual Rate.

b. Greatest future wealth: Future Value.

c. MIRR: Multiple Interest Required Return.

d. Greatest wealth today: Present Value.

14. Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 8% and the effective rate of interest is also 8%.

b. The periodic rate of interest is 2% and the effective rate of interest is 4%.

c. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

d. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.

e. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

15. JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

a. $1,781.53

b. $1,870.61

c. $1,964.14

d. $2,062.34

e. $2,165.46

16. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

a. $205.83

b. $216.67

c. $228.07

d. $240.08

e. $252.08

17. Suppose a State of North Carolina bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

a. $585.43

b. $614.70

c. $645.44

d. $677.71

e. $711.59

18. You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?

a. $1,067.95

b. $1,124.16

c. $1,183.33

d. $1,245.61

e. $1,311.17

19. You have just purchased a U.S. Treasury bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate will you earn on this bond?

a. 4.37%

b. 4.86%

c. 5.40%

d. 6.00%

e. 6.60%

20. What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

a. $11,262.88

b. $11,826.02

c. $12,417.32

d. $13,038.19

e. $13,690.10

Reference no: EM131783672

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