Quiz #3

Quiz #3

QUESTION 1

1. Increase in sales will affect net working capital and NPV.

True

False

5 points   

QUESTION 2

1. All of the following are weaknesses of the payback period EXCEPT

	1.	a disregard for cash flows after the payback period.
	2.	it uses cash flows, not accounting profits.
	3.	only an implicit consideration of the timing of cash flows
	4.	the difficulty of specifying the appropriate payback period

5 points   

QUESTION 3

1. The minimum return that must be earned on a project in order to leave the firm’s value unchanged is

	1.	the interest rate.
	2.	the cost of capital.
	3.	the compound rate.
	4.	the internal rate of return.

5 points   

QUESTION 4

1. If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

	1.	constrained capital.
	2.	profitability.
	3.	wealth optimization.
	4.	capital rationing.

5 points   

QUESTION 5

1. Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment if any, should the firm choose if the cost of capital is 25 percent?

	1.	Project X
	2.	Project Y.
	3.	Neither.
	4.	Not enough information to tell.

5 points   

QUESTION 6

1. The cost of debt is lower than the costs of stocks.

True

False

5 points   

QUESTION 7

1. Cost of Preferred stock is higher than the cost of common stocks.

True

False

5 points   

QUESTION 8

1. What is the net present value of a project that requires a net investment of $76,000 and produce net cash flows of $22,000 per year for seven years? Assume the cost of capital is 15% and net terminal cash flow of negative $16,000?

	1.	$9,514
	2.	zero.
	3.	$7,560
	4.	$11,800
	5.	$6,540

10 points   

QUESTION 9

1. Generally the least expensive source of long-term capital is

	1.	retained earnings.
	2.	preferred stock.
	3.	short-term debt.
	4.	long-term debt.

10 points   

QUESTION 10

1. As a source of financing, once retained earnings have been exhausted, the weighted average cost of capital will

	1.	decrease.
	2.	change in an undetermined direction.
	3.	increase.
	4.	remain the same.