3.2 b. Costs of goods sold increased.

c. Depreciation increased.
1.​Which of the following statements is most correct?
a. Cash flows and accounting profit are not at all related since no common elements are
used in the calculation of either individual measure. d. Interest expense increased.
b. Accounting profits are more important than free cash flow. e. Taxes increased.
c. High inflation can seriously distort firms' balance sheets, and since inflation also
affects depreciation and inventory costs, profits can also be affected. 7.​ Solo Company has been depreciating its fixed assets over 15 years. It is now clear that
d. None of the statements above is correct. these assets will only last a total of 10 years. Solo's accountants have encouraged the firm to
revise its annual depreciation to reflect this new information. Which of the following would occur
2.​ On its 2018 balance sheet, Sherman Books showed a balance of retained earnings equal as a result of this change?
to $510 million. On its 2019 balance sheet, the balance of retained earnings was also equal to a. The company's earnings per share would decrease.
$510 million. Which of the following statements is most correct? b. The company's cash position would increase.
a. The company must have had net income equal to zero in 2019. c. The company's EBIT would increase.
b. The company did not pay a dividend in 2019. d. Both a and b are correct.
c. If the company's net income in 2019 was $200 million, dividends paid must have also e. All of the answers above are correct.
equaled $200 million.
d. If the company lost money in 2019, they must have paid a dividend. 8.​ The CFO of Mulroney Brothers has suggested that the company should issue $300
e. None of the statements above is correct. million worth of common stock and use the proceeds to reduce some of the company's
outstanding debt. Assume that the company adopts this policy, and that total assets and
operating income (EBIT) remain the same. The company's tax rate will also remain the
same. Which of the following will occur:
3.​Which of the following would not cause an increase in net operating working capital?
a. The company's net income will increase.
a. Inventory increases.
b. The company's taxable income will fall.
b. Accounts receivable increases.
c. The company will pay less in taxes.
c. Short-term investments increase.
d. All of the answers above are correct.
d. Accounts payables decrease.
e. Answers b and c are correct.

4.​ Which of the following are likely to occur if Congress passes legislation which forces 9.​ Kramer Corporation recently announced that its net income was lower than last year.
Carter Manufacturing to depreciate their equipment over a longer time period: However, analysts estimate that the company's net cash flow increased. What factors could
a. The company's physical stock of assets would increase. explain this discrepancy?
a. The company's depreciation expense increased.
b. The company's reported net income would decline.
b. The company's interest expense declined.
c. The company's cash position would decline.
c. The company had an increase in its noncash revenues.
d. All of the answers above are correct.
d. Answers a and b are correct.
e. Answers b and c are correct.
e. Answers b and c are correct.
5.​ Assume that a company currently depreciates its fixed assets over 7 years. Which of the NI thấp hơn, NCF tăng
following would occur if a tax law change forced the company to depreciate its fixed assets over
10 years instead? 10.​ Holmes Aircraft recently announced an increase in its net income, yet its net cash flow
a. The company's tax payment would increase. declined relative to last year. Which of the following could explain this performance?
a. The company's interest expense increased.
b. The company's cash position would increase.
b. The company's depreciation expense declined.
c. The company's net income would increase.
c. The company's operating income declined.
d. Answers a and c are correct.
d. All of the statements above are correct.
e. Answers b and c are correct.
e. None of the statements above is correct.
6.​ Harmeling Enterprises experienced a decline in net operating profit after taxes (NOPAT).
Which of the following definitely cannot help explain this decline?
a. Sales revenues decreased.
 d. 1,100 billion VND​
3.3 e. 1,275 billion VND​
1.​ Last year, Company A had a negative net cash flow, but its cash balance increased. What
could explain this?​ 7.​ Company E is expanding its operations. The company expects revenue to increase by
a. The company took on long-term debt.​ $1,000,000 and operating expenses (excluding depreciation) to rise by $700,000.
b. The company repurchased common shares.​ Depreciation expenses will increase by $50,000, and interest expenses will rise by $150,000.
c. The company sold some assets.​ The income tax rate is 40%. If the company’s forecast is accurate, how much will net
d. Both (a) and (b) are correct.​ income change due to the expansion?​
e. Both (a) and (c) are correct.​ a. No change.​
b. Increase by $40,000.​
2.​ Company B had initially estimated the depreciation of its fixed assets over 12 years. c. Increase by $60,000.​
However, after re-evaluating, they found that the assets could only be used for a maximum d. Increase by $100,000.​
of 10 years. The company’s accountant recommended adjusting the depreciation expense e. Increase by $180,000.​
accordingly. What will happen due to this change?​
a. The company’s earnings per share (EPS) will decrease.​ 8.​ Company F has prepared the following income statement forecast for next year:​
b. The company's cash flow will increase.​
c. The company’s EBIT will increase.​
d. Statements (a) and (b) are correct.​
e. All of the above are correct.​

3.​ Which of the following statements best describes free cash flow (FCF)?​
a. Free cash flow is the amount of cash available to all investors after necessary investments
in working capital.​
b. Free cash flow is the amount of cash available to shareholders after necessary
investments in working capital.​
c. Free cash flow is the net change in cash balance on the balance sheet.​
d. Free cash flow equals net income plus depreciation.​
e. Free cash flow equals cash flow from non-taxable transactions.​

4.​ Last year, Company C had a positive net cash flow, but its cash balance on the balance sheet
decreased. What could explain this?​
a. The company issued new shares.​
The company’s CEO is not satisfied with this projection and wants a higher revenue to achieve a net
b. The company issued new debt.​
income of $1,000. Assuming operating expenses (excluding depreciation) remain at 65% of revenue
c. The company sold some assets.​
and depreciation, interest expenses, and tax rates stay the same, what should the company’s revenue
d. The company purchased a large amount of fixed assets.​
be to achieve the $1,000 net income goal?​
e. The company did not pay dividends.​
a. $5,800​
b. $6,000​
5.​ Which of the following statements is the most accurate?​
c. $7,200​
a. Activities that increase net income will always increase net cash flow.​
d. $9,904.76​
b. One way to increase EVA is to maintain constant operating profit with lower working
e. $12,867.25​
capital.​
c. A drawback of EVA in measuring performance is that it falsely assumes that equity
9.​ Last year, Company G had:​
capital has no cost.​
d. Both (a) and (b) are correct.​
○​ Net income: $400
e. Both (a) and (c) are correct.​
○​ NOPAT: $500
○​ Total assets: $2,000
6.​ Company D has a net income (NI) of 385 billion VND. The tax rate is 40%. Interest expense
○​ Net operating capital: $1,700
is 200 billion VND. If the company's EBIT doubles while the tax rate and interest expense
This year, the company has:​
remain unchanged, what will the new net income be?​
a. 770 billion VND​
○​ Net income: $800
b. 890 billion VND​
○​ NOPAT: $700
c. 920 billion VND​
 ○​ Total assets: $2,300 What is the company’s total operating capital (TOC)?​
○​ Net operating capital: $2,100 a. $90​
10.​What is the company’s free cash flow (FCF) this year?​ b. $120​
a. $300​ c. $150​
b. $400​ d. $200​
c. $500​ e. $230
d. $600​ 14.​Company K is expanding and expects revenue to increase by $1,000,000, with operating
e. $700​ expenses increasing by $700,000, depreciation by $50,000, and interest expense by
$150,000. The tax rate is 40%. How will net income change?​
11.​Suppose a company currently depreciates its fixed assets over 7 years. What will happen if a. No change.​
regulations change and require depreciation over 10 years?​ b. Increase by $40,000.​
a. The company’s tax payments will increase.​ c. Increase by $60,000.​
b. The company’s cash balance will increase.​ d. Increase by $100,000.​
c. The company’s after-tax profit will increase.​ e. Increase by $180,000.​
d. Both (a) and (c) are correct.​
e. Both (b) and (c) are correct.​ 15.​Company L’s financial data:​

12.​Company H has the following information for the current year:​ ●​ Last year: Net income = $400, NOPAT = $600, Total assets = $2,000, Net operating capital
= $1,800
●​ Net income: $600 ●​ Current year: Net income = $600, NOPAT = $800, Total assets = $2,300, Net operating
●​ NOPAT: $500 capital = $2,200
●​ Total assets: $4,000 What is this year’s free cash flow (FCF)?​
●​ Short-term investments: $500 a. $300​
●​ Equity: $2,000 b. $400​
●​ Debt: $1,000 c. $500​
●​ Net operating capital: $2,500 d. $600​
If the company’s cost of capital is 10%, what is its economic value added (EVA)?​ e. $700
a. $250​ 4
b. $300​ 1.​ Company A's current ratio is 0.5, while Company B's current ratio is 1.5. If both companies
c. $350​ double their short-term debt by increasing short-term borrowing and keeping the borrowed
d. $375​ amount in their cash account, which of the following statements best describes the actual
e. $400 outcome of these transactions?​
12.​Company I recently announced the following financial data: a. This transaction does not affect the current ratio.​
●​ Net income: $600,000 b. The current ratio of both companies will increase.​
●​ Tax rate: 40% c. The current ratio of both companies will decrease.​
●​ Interest expense: $200,000 d. Only Company A's current ratio will increase.​
●​ Net operating capital: $9 million e. Only Company B's current ratio will increase.​
●​ After-tax cost of capital: 10%
What is the company’s economic value added (EVA)?​ 2.​ Which of the following statements is most accurate?​
a. -$300,000​ a. An increase in the average collection period while revenue remains unchanged will
b. -$180,000​ generally increase total asset turnover.​
c. $0​ b. An increase in the average collection period, holding other factors constant, will increase
d. $200,000​ ROE.​
e. $400,000 c. An increase in the debt ratio, without changes in revenue or operating expenses, will
13.​Company J has the following balance sheet: decrease the net profit margin.​
●​ Cash: $20 d. Adjusting the debt-to-total-assets ratio is more important than adjusting inventory
●​ Short-term investments: $30 turnover to reflect seasonal changes in a company's operations.​
●​ Accounts receivable: $20
●​ Inventory: $60 3.​ Company C has been satisfied with its revenue growth in recent years due to its decision to
●​ Total current assets: $130 sell on credit. However, the company is now facing an increasing collection period. Last
●​ Total liabilities and equity: $230 year, credit sales were $250,000, and the average accounts receivable throughout the year
●​ Depreciation: $40 was $41,096. The company expects a 50% increase in revenue this year while maintaining
 the same proportion of credit sales. The average collection period is expected to increase by ●​ The slope of the SML (Security Market Line) is beta.
50% (assuming 365 days per year). If the additional accounts receivable are financed ●​ The slope of the SML is the market risk premium.
externally, how much additional funding will the company need?​ ●​ If a company's beta doubles, its required rate of return increases by more than double.
●​ Both A and C are correct.
4.​ Company D's common stock is currently priced at $100 per share, with a P/E ratio of 10. ●​ Both B and C are correct.
The company has 100 shares outstanding, an ROE of 20%, and a debt ratio of 60%. What is 3. Which statement is the most correct? (Assume the risk-free interest rate remains unchanged)​
the company's ROA?​ A. If the market risk premium increases by 1%, the required return of all stocks also increases by
1%.​
5.​ Company A has a net profit margin of 4%, an average collection period of 60 days (365 B. If the market risk premium increases by 1%, the required return of stocks with a beta greater
days per year), accounts receivable of $147,945.2, total assets of $3 million, and a than 1.0 will increase, while the required return of stocks with a beta less than 1.0 will decrease.​
debt-to-total-assets ratio of 0.64. What is the company's return on equity (ROE)?​ C. If the market risk premium increases by 1%, the required return of stocks with a beta less than
1.0 will increase by 1%.​
6.​ A company has total annual interest expenses of $10,000, revenue of $1 million, an income D. The impact of changes in the market risk premium depends on the risk-free interest rate.​
tax rate of 40%, and a net profit margin of 6%. What is the times interest earned (TIE) ratio?​ E. If the market risk premium increases by 1%, the required return of stocks with a beta of 1.0 will
increase by 1%.
7.​ Company B recently announced a net income of $1,500,000. The company has 300,000 4. Stock X has a beta of 0.5, and Stock Y has a beta of 1.5. Which statement is correct?​
common shares outstanding, and the stock is currently trading at $60 per share. The A. The actual return of Stock Y in the next year will be higher than that of Stock X.​
company plans to expand and expects next year's net income to be $2,500,000. The B. The standard deviation of Stock Y's return will be higher than that of Stock X.​
company also plans to issue an additional 100,000 shares, bringing the total shares C. If expected inflation increases (but the market risk premium remains unchanged), the required
outstanding next year to 400,000. Assuming the P/E ratio remains the same, what will be the return of both stocks will increase equally.​
stock price at the end of next year?​ D. If the market risk premium decreases while the risk-free rate remains unchanged, the required
return of Stock X will decrease more than that of Stock Y.​
8.​ Company C has total assets of $100 million and an income tax rate of 40%. The company's E. Both B and C are correct.
basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 9%. What is the 5. A company's stock has a required return of 13.0%, with a risk-free rate of 7.0% and a market risk
company's interest expense?​ premium of 4.0%. If investor risk aversion increases and the market risk premium rises by 2%, what
will be the new required return of the company's stock?
9.​ Company D has the following information:​ 6. Stock X has a beta of 1.3, while Stock Y has a beta of 0.7. The required return of a market index
fund holding the entire stock market is 12%. The risk-free rate is 7%. How much higher is Stock
○​ Net revenue: $1,200,000 X’s required return compared to Stock Y’s required return?
○​ Total short-term debt: $375,000 7. Your portfolio includes:
○​ Average collection period (DSO) (365 days): 40 ●​ $100,000 invested in a stock with a beta of 0.8,
○​ Inventory turnover: 4.8 ●​ $150,000 invested in a stock with a beta of 1.2,
○​ Current ratio: 1.2 ●​ $50,000 invested in a stock with a beta of 1.8.
10.​The company’s current assets include cash, inventory, and accounts receivable. Calculate the The risk-free rate is 7%. Last year, the required return of the portfolio was 13%. This year,
amount of cash the company has on its balance sheet.​ everything remains the same except the market risk premium increases by 2% (two percentage
points). What is the current required return of the portfolio?
11.​Company E has a debt ratio of 0.5, a total asset turnover ratio of 0.25, and a net profit 8. The return of Stock B over the past three years was:
margin of 10%. The company's CEO is not satisfied with the current ROE and believes it Year Return
can be doubled. This can be achieved by (1) increasing the net profit margin to 12% and (2)
increasing the use of debt. Assuming total asset turnover remains unchanged, what should 2019 25%
the new debt ratio be to double ROE while maintaining the new net profit margin of 12%?
2018 -10%
5
1. In a balanced market condition, meaning there is no pressure to push stock prices away from their 2017 30%
current level:​ Calculate the standard deviation of Stock B’s return.
A. The expected rate of return must be equal to the required rate of return, meaning = r.​ 9. Suppose investors expect future inflation to be 5%. The real risk-free rate is 3%, and the market
B. The actual rate of return achieved in the past must be equal to the expected rate of return, risk premium is 5%. Company C has a beta of 2.0, and its average actual return over the past five
meaning = .​ years was 15%. Calculate the required return of Stock C.
C. The required rate of return must be equal to the actual rate of return, meaning r = .​ 10. The current risk-free rate is 6%, and the market risk premium is 5%. Mr. Tu plans to invest
D. The above situations exist in equilibrium, meaning = r = .​ $30,000 in the stock market and expects his portfolio to achieve a return of 12.5%. He plans to
E. None of the statements are correct. diversify by investing in three asset types (two mutual funds and one risk-free security). These
2. Which statement is the most correct? assets include:
 ●​ A high-growth mutual fund with a beta of 1.6, Year Return
●​ An S&P 500 index fund with a beta of 1.0,
●​ A risk-free security with a beta of 0. 2019 25%
Mr. Tu has decided to allocate 10% of his funds to the risk-free security. To achieve the expected
return of 12.5%, what percentage of his investment should be allocated to the S&P 500 index fund? 2018 -10%

1. In a balanced market condition, meaning there is no pressure to push stock prices away from their 2017 30%
current level:​ Calculate the standard deviation of Stock B’s return.
A. The expected rate of return must be equal to the required rate of return, meaning = r.​ 9. Suppose investors expect future inflation to be 5%. The real risk-free rate is 3%, and the market
B. The actual rate of return achieved in the past must be equal to the expected rate of return, risk premium is 5%. Company C has a beta of 2.0, and its average actual return over the past five
meaning = .​ years was 15%. Calculate the required return of Stock C.
C. The required rate of return must be equal to the actual rate of return, meaning r = .​ 10. The current risk-free rate is 6%, and the market risk premium is 5%. Mr. Tu plans to invest
D. The above situations exist in equilibrium, meaning = r = .​ $30,000 in the stock market and expects his portfolio to achieve a return of 12.5%. He plans to
E. None of the statements are correct. diversify by investing in three asset types (two mutual funds and one risk-free security). These
2. Which statement is the most correct? assets include:
●​ The slope of the SML (Security Market Line) is beta. ●​ A high-growth mutual fund with a beta of 1.6,
●​ The slope of the SML is the market risk premium. ●​ An S&P 500 index fund with a beta of 1.0,
●​ If a company's beta doubles, its required rate of return increases by more than double. ●​ A risk-free security with a beta of 0.
●​ Both A and C are correct. Mr. Tu has decided to allocate 10% of his funds to the risk-free security. To achieve the expected
●​ Both B and C are correct. return of 12.5%, what percentage of his investment should be allocated to the S&P 500 index fund?
3. Which statement is the most correct? (Assume the risk-free interest rate remains unchanged)​ 6.1
A. If the market risk premium increases by 1%, the required return of all stocks also increases by 1.​ Company A is considering a project with the following cash flows:​
1%.​
B. If the market risk premium increases by 1%, the required return of stocks with a beta greater
Year 0 1 2 3 4 5
than 1.0 will increase, while the required return of stocks with a beta less than 1.0 will decrease.​
C. If the market risk premium increases by 1%, the required return of stocks with a beta less than Cash Flow -$1,000 $300 $310 $320 $330 $340
1.0 will increase by 1%.​
D. The impact of changes in the market risk premium depends on the risk-free interest rate.​ 2.​ ​
E. If the market risk premium increases by 1%, the required return of stocks with a beta of 1.0 will Calculate the project's payback period.​
increase by 1%.
4. Stock X has a beta of 0.5, and Stock Y has a beta of 1.5. Which statement is correct?​ 3.​ Company B is implementing a project with the following cash flows:​
A. The actual return of Stock Y in the next year will be higher than that of Stock X.​
B. The standard deviation of Stock Y's return will be higher than that of Stock X.​ Year 0 1 2 3 4 5
C. If expected inflation increases (but the market risk premium remains unchanged), the required
return of both stocks will increase equally.​ Cash Flow -$200,000 $50,000 $100,000 $150,000 $40,000 $25,000
D. If the market risk premium decreases while the risk-free rate remains unchanged, the required 4.​ ​
return of Stock X will decrease more than that of Stock Y.​ The project's cost of capital is 10%. What is the project's discounted payback period?​
E. Both B and C are correct.
5. A company's stock has a required return of 13.0%, with a risk-free rate of 7.0% and a market risk 5.​ Company C is evaluating a project with the following cash flows and WACC:​
premium of 4.0%. If investor risk aversion increases and the market risk premium rises by 2%, what
will be the new required return of the company's stock? ○​ WACC = 10%
6. Stock X has a beta of 1.3, while Stock Y has a beta of 0.7. The required return of a market index 6.​
fund holding the entire stock market is 12%. The risk-free rate is 7%. How much higher is Stock
X’s required return compared to Stock Y’s required return? Year 0 1 2 3 4
7. Your portfolio includes:
Cash Flow -$1,000 $475 $475 $475 $475
●​ $100,000 invested in a stock with a beta of 0.8,
●​ $150,000 invested in a stock with a beta of 1.2, 7.​ ​
●​ $50,000 invested in a stock with a beta of 1.8. What is the project's NPV?​
The risk-free rate is 7%. Last year, the required return of the portfolio was 13%. This year,
everything remains the same except the market risk premium increases by 2% (two percentage 8.​ Company D is evaluating a project with the following cash flows:​
points). What is the current required return of the portfolio?
8. The return of Stock B over the past three years was: Year 0 1 2 3 4
 Cash Flow ? $2,000 $3,000 $3,000 $1,500 ○​ The project has a 6-year life.
○​ Annual revenue is expected to be $90,000.
9.​ ​ ○​ Operating expenses (excluding depreciation) are estimated at $50,000 per year.
The project has a payback period of 2.5 years and a cost of capital of 12%. What is the ○​ After 6 years, the estimated salvage value is $10,000.
project's net present value (NPV)?​ ○​ The company's cost of capital is 10%, and the corporate tax rate is 40%.
16.​What is the project's NPV?​
10.​ Company A is considering two independent investment opportunities. The company’s
investment policy requires that projects be accepted only if they can recover the initial cost within 17.​ GHN Company is considering a project with an initial investment and positive cash flows.
three years. The company uses the discounted payback method with a discount rate of 10%. The estimated cash flows are:​
The cash flows of the two projects are as follows:​
​
Project A​ Year 0 1 2 3 4

Cash Flow ? $500M $300M $400M $600M

11.​ ​ 19.​A new project for Company D requires an investment of $10,000 and has an estimated
Project B​ 10-year life. The IRR is 15%. Assuming even end-of-year cash flows and a tax rate of
40%, what is the annual pre-tax cash flow? (Assume depreciation is negligible.)​
Year 0 1 2 3 4
20.​Sushi Tony, a company specializing in canned salmon, is considering a new automated
Cash Flow -$80,000 $50,000 $20,000 $30,000 $0 production line. The project costs $275,000 and is expected to generate $73,306 in
12.​​ after-tax cash flow annually for 8 years.​
Which project should the company invest in?​
○​ The company’s management prefers MIRR over IRR due to its reinvestment
13.​Company B wants to invest in a new computer system. The company must choose between assumption.
System A and System B, both of which require an initial cost of $100,000.​ ○​ The company's cost of capital is 12%.
21.​What is the project's MIRR?​
○​ System A generates $60,000 in after-tax cash flow at the end of each year for two
years. It can be replaced every two years with identical cash flows. 22.​ A project has the following cash flows:​
○​ System B generates $48,000 in after-tax cash flow at the end of each year for three
years. It can be replaced every three years, but each time it is replaced, both inflows Year 0 1 2 3 4 5
and outflows increase by 10%.
14.​The company needs a computer system for six years. The company's cost of capital is 11%. Cash Flow -$500 $200 -X $196 $350 $451
Which system provides the highest NPV (based on a 6-year expansion period)?​ ○​ The project incurs costs for equipment purchase at year 0 and equipment renovation
at year 2.
15.​ Company C is evaluating a project requiring an initial investment of $100,000 at t=0. The ○​ The remaining cash flows are inflows.
project will be depreciated using the following annual rates:​ ○​ WACC = 10%, and MIRR = 14.14%.
23.​What is the cash flow at year 2?​
Year Depreciation Rate
24.​Company B is considering a project involving the construction of a new cold storage
1 20% facility with an initial cost of $7,000,000 (at t=0).​
2 32% ○​ The project generates $500,000 in operating cash flow annually for 20 years.
○​ However, at the end of year 10, a $1,000,000 repair cost is required.
3 19%
○​ Thus, the cash flow at the end of year 10 consists of a $500,000 inflow and a
4 12% $1,000,000 outflow.
○​ The company’s cost of capital is 12%.
5 11% 25.​What is the project’s MIRR?​

6 6% 26.​ The CFO of Company E is evaluating two mutually exclusive projects, X and Z, with the
following cash flows:​
5.​ Five years ago, Frater Zahn’s Company invested $38 million - $30 million in fixed
Year Project X Project Z capital and another $8 million in working capital – in a bakery. Today, Frater Zahn’s
is selling the fixed assets for $21 million and liquidating the investment in working
0 -$100 -$100 capital. The book value of the fixed assets is $15 million and the marginal tax rate is
40 percent. The fifth year’s after-tax non- operating cash flow to Frater Zahn’s is
1 $50 $10 closest to
A.​ $20.6 million.
2 $40 $30 B.​ $23.0 million.
C.​ $26.6 million.
3 $30 $40
7.2
4 $10 $60 1.​ A company should not undertake a project if accepting the project increases the company's
cost of capital.​
27.​​
Do the two projects have a crossover rate? If so, what is the crossover discount rate?​ 2.​ Reducing the discount rate will increase NPV, which may change the decision to accept or
reject a potential project. However, such a change does not affect IRR, and therefore does
7 not impact the decision to accept or reject the project using the IRR method.​

1.​ FITCO is considering the purchase of new equipment. The equipment cost $350,000, 3.​ A company estimates that its weighted average cost of capital (WACC) is 10%. Which of
and an additional $110,000 is needed to install it. The equipment will be depreciated the following independent projects should be accepted?​
straight-line to zero over a five-year life. The equipment will generate additional a. Project A requires an initial investment of $1,000,000 and has an NPV of $3,200.​
annual revenues of $265,000, and it will have annual cash operating expenses of b. Project B has an MIRR of 9.5%.​
$83,000. The equipment will be sold for $85,000 after five years. An inventory c. Project C requires an initial investment of $1,000,000 and has an IRR of 9.7%.​
investment of $73,000 is required during the life of the investment. FITCO is in the d. Project D has an IRR of 9.5%.​
40 percent tax bracket and its cost of capital is 10 percent. What is the project NPV? e. None of the above projects should be accepted.​
A.​ $52,122.
B.​ $64,090. 4.​ Project A has an IRR of 18%, while Project B has an IRR of 16%. However, if the
C.​ $97,449. company's cost of capital is 12%, Project B has a higher NPV. Which of the following
statements is most accurate?​
2.​ After estimating a project’s NPV, the analyst is advised that the fixed capital outlay a. The discount rate at which the NPV of the two projects is equal (crossover rate) is less
will be revised upward by $100,000. The fixed capital outlay is depreciated than 12%.​
straight-line over an eight- year life. The tax rate is 40 percent and the required rate b. Assuming both projects have the same lifespan, Project A is larger in scale than Project
of return is 10 percent. No changes in cash operating revenues, cash operating B.​
expenses, or salvage value are expected. What is the effect on the project NPV? c. Assuming both projects are of the same scale, Project A has a faster payback period than
A.​ $100,000 decrease. Project B.​
B.​ $73,325 decrease. d. Both a and b are correct.​
C.​ $59,988 decrease. e. Both b and c are correct.​

3.​ When assembling the cash flows to calculate an NPV or IRR, the project’s after-tax 5.​ Using an accelerated depreciation method results in lower profits for the owner but higher
interest expenses should be subtracted from the cash flows for cash flows compared to the straight-line depreciation method over the project's lifetime.​
A.​ the IRR calculation, but not the NPV calculation.
B.​ both the NPV calculation and the IRR calculation. 6.​ The additional net cash flow is calculated by adding the depreciation difference to the net
C.​ neither the NPV calculation nor the IRR calculation. income difference.​

4.​ Standard Corporation is investing $400,000 of fixed capital in a project that will be 7.​ If a project will use land that the company already owns, the project must account for the
depreciated straight-line to zero over its ten-year life. Annual sales are expected to be opportunity cost of the land.​
$240,000, and annual cash operating expenses are expected to be $110,000. An
investment of $40,000 in net working capital is required over the project’s life. The 8.​ Which of the following is NOT a cash flow arising from the project decision?​
corporate income tax rate is 30 percent. What is the after-tax operating cash flow a. Changes in working capital​
expected in year one? b. Transportation and installation costs​
A.​ $63,000. c. Sunk costs​
B.​ $92,000. d. Opportunity costs​
C.​ $103,000.
 e. Externalities​ Straight-line depreciation rate 33.33%
9.​ Company A plans to expand its business by opening a new store on land it purchased 10 Revenue $70,000
years ago. Which of the following items should be included in the cash flow analysis?​
Operating costs excluding depreciation $25,000
○​ The land was cleared 5 years ago at a total cost of $5,000.
○​ The new store will affect the profitability of existing stores as some current Tax rate 35%
customers will shift to the new store. Company A estimates the net profit of existing 13.​Company A plans to replace old equipment with new equipment priced at $60,000.
stores will decrease by 10%. ●​ The old equipment originally cost $40,000 and has an expected remaining life of four years
○​ Instead of opening a new store, Company A could rent the land to another company with a current book value of $30,000.
for warehouse use, with an estimated rental income of $5,000 per year. ●​ However, its market value is now only $24,000.
○​ Both b and c should be included in the estimated cash flow. ●​ The company's corporate tax rate is 40%.
○​ All a, b, and c should be included in the estimated cash flow. ●​ If the company sells the old equipment at market value and purchases the new equipment,
10.​Johnson Jets is considering two mutually exclusive equipment systems.​ calculate the additional amount Company A must pay (after considering proceeds from
selling the old equipment).
●​ System A requires an initial investment of $100,000 (CF0 = -100,000) and generates 14.​Your company is evaluating equipment that costs $50,000 at time 0 and can be sold after
after-tax cash flows of $40,000 at the end of each year for the next six years. three years for $10,000.
●​ System B requires an initial investment of $50,000 (CF0 = -50,000) and generates after-tax ●​ An additional $12,000 must be invested at time 0 in inventory and accounts receivable; this
cash flows of $30,000 at the end of each year for the next three years. entire amount will be recovered when the project ends at the end of year 3.
●​ After three years, System B can be replaced at a cost of $55,000 (paid at t = 3). The ●​ The equipment will generate annual revenue of $50,000 for three years.
replacement system will generate after-tax cash flows of $32,000 per year for the next three ●​ Variable operating costs will be 40% of revenue, and there are no fixed operating costs other
years (cash flows received at t = 4, 5, and 6). than depreciation.
●​ The company's cost of capital is 10.5%. ●​ Operating cash flows start in year 1.
●​ What is the NPV (calculated over six years) of the more profitable project? ●​ Depreciation of the equipment is as follows:
11.​Company B is evaluating a new project with the following data: ○​ Year 1: $40,000
●​ The equipment used has a tax life of three years, after which it has no residual value and is ○​ Year 2: $5,000
depreciated using the straight-line method. ○​ Year 3: $5,000
●​ Revenue and other operating costs are expected to remain constant over the three-year ●​ The corporate tax rate is 40%. If the project incurs a net loss, the company will receive a tax
project life. refund.
●​ What is the operating cash flow in year 1? ●​ The cost of capital is 15%. There is no inflation.
Item Value ●​ What is the NPV of the project?
CHAPTER 1
Equipment cost (depreciation base) $75,000 1.​ Which of the following is the most important objective for a financial manager of a
corporation?​
Straight-line depreciation rate 33.33% a. Maximizing the company's profit​
b. Maximizing the income of employees and managers of the company​
Revenue $60,000 c. Maximizing the company's value​
Operating costs excluding depreciation $25,000 d. Maximizing the company's market share
2.​ A decision regarding the purchase of a fixed asset is called a:​
Tax rate 35% a. Capital structure decision​
b. Working capital decision​
12.​Company D is considering a new project with the following data: c. Capital budgeting decision​
●​ The equipment is depreciated using the straight-line method over the three-year project life d. Financing decision
and has no salvage value. 3.​ Which of the following activities is not a responsibility of a financial manager?​
●​ The project requires no additional working capital. a. Coordinating and controlling cash flow when working with other departments to ensure
●​ Revenue and other operating costs are expected to remain constant over the three years. efficient business operations​
●​ What is the NPV of the project? (Hint: Cash flows remain constant from year 1 to year 3.) b. Forecasting and planning sales to generate revenue​
Item Value c. Operating and understanding financial market activities​
d. Making important financing and investment decisions
WACC 10% 4.​ Which type of business entity below is not restricted in its ability to raise large amounts of
capital?​
Net investment cost (depreciation base) $65,000
a. Limited liability company​
 b. Sole proprietorship​ 2.​ You have $2,000 in a bank account earning 4% annual interest, compounded daily. How
c. Corporation​ much will be in your account after 132 days (assuming a 365-day year)?
d. Partnership a. $2,028.93​
5.​ Which of the following explains why businesses often choose to operate as a corporation b. $2,023.99​
rather than a sole proprietorship or a partnership?​ c. $2,040.00​
a. Corporations typically find it easier to raise capital.​ d. $2,023.44​
b. Corporations generally have unlimited liability.​ e. $2,029.14
c. Corporations are usually taxed less.​ 3.​ You plan to buy a car in 5 years and intend to save $3,000 annually for the next 5 years,
d. Corporations are less regulated by the government. starting today. Assuming the savings account earns 6% interest, how much will you have in
6.​ Which of the following statements is the most accurate?​ 5 years to buy the car?
a. One disadvantage of a sole proprietorship is that it is subject to corporate income tax.​ a. $16,110.34​
b. One advantage of a corporation is that shareholders have limited liability.​ b. $15,976.84​
c. Corporations are less regulated by the government than sole proprietorships.​ c. $17,513.68​
d. Sole proprietorships have limited liability. d. $17,925.96
7.​ Which of the following questions is not related to the financing decision of a financial 4.​ Your father has an investment account worth $500,000 with an 8% interest rate and wants to
manager?​ retire. He plans to withdraw $50,000 annually, starting at the end of this year. How many
a. Which source of financing has the lowest cost?​ years until his account is depleted?
b. How should the company finance its assets—through equity or debt?​ a. 20.91 years​
c. Should the company sponsor a sports event or a television entertainment program?​ b. 18.49 years​
d. How, when, and from where should capital be raised? c. 13.91 years​
8.​ Which of the following statements is incorrect according to financial management d. 15.27 years
principles?​ 5.​ Calculate the effective annual interest rate for a savings account with a nominal rate of 6%
a. When measuring the economic efficiency of a project, all cash flows should be brought to compounded monthly.
the same point in time, usually the present.​ a. 6.71%​
b. To maximize shareholder value, the company should separate the interests of managers b. 6.59%​
from those of shareholders.​ c. 5.10%​
c. Businesses should maintain the minimum cash balance necessary to ensure liquidity.​ d. 6.17%
d. A financial manager must choose the project with the highest return within the acceptable 6.​ Mr. Ba wants to borrow $10,000 from a bank for one year. Two banks offer the following
risk range. terms:
9.​ Which of the following statements is correct?​ ●​ Bank A offers a 7% interest rate, compounded monthly, with repayment of principal and
a. According to technical analysis, investors choose stocks with intrinsic value higher than interest at the end of the year.
market price.​ ●​ Bank B offers an 8% interest rate with interest paid at the end of the year.​
b. According to technical analysis, investors choose stocks with market price higher than Calculate the difference in effective annual rates between these two banks.​
intrinsic value.​ a. 1.1%​
c. According to fundamental analysis, investors choose stocks with market price higher than b. 1.59%​
intrinsic value.​ c. 1.71%​
d. According to fundamental analysis, investors choose stocks with intrinsic value higher d. 0.77%
than market price. 7.​ Mr. Nam takes out a $25,000 loan with an 8% interest rate. He must make fixed payments at
10.​Corporate finance is related to:​ the end of each year for 4 years. Calculate the principal portion of his first-year payment.
a. Asset management decisions​ a. $4,976​
b. Recruitment decisions of the responsible department​ b. $5,349​
c. Investment decisions​ c. $6,110​
d. Financing decisions d. $5,548
CHAPTER 2 8.​ You borrow $25,000 at an 8% interest rate, making equal payments at the end of each year
1.​ Which of the following statements is the most accurate? (Select one or more): for 4 years. How much do you still owe at the end of the first year after making your first
a. If interest is compounded annually, the effective annual rate (EAR) equals the nominal annual payment?
interest rate.​ a. $18,513​
b. The effective annual rate (EAR) equals the nominal annual interest rate.​ b. $19,452​
c. If the interest rate is 1% per month, the effective annual rate is 12% per year.​ c. $21,110​
d. If the nominal interest rate is 12% and interest is compounded quarterly, the effective annual rate d. $19,049
is 11.66% per year. 9.​ Today is your sister’s 30th birthday. She plans to save $3,000 annually, starting one year
from today, by investing in a mutual fund with an expected return of 10% per year. She
 plans to retire in 35 years (at age 65) and live until age 95. How much can she withdraw c. If interest is compounded annually, the effective annual rate, nominal rate, and compounding
annually after retirement (first withdrawal at the end of the first retirement year)? period rate are all equal.​
a. $86,250​ d. The present value of an annuity due (n = 5 years, pmt = $100) is greater than that of an ordinary
b. $88,513​ annuity with the same terms.
c. $78,976​ 17.​Company MMM wants to borrow money to expand its operations.
d. $91,110 ●​ Bank A offers an 8% nominal interest rate, compounded monthly.
10.​After graduation, you plan to work at Google for 10 years before starting your own business. ●​ Bank B offers a 9% nominal interest rate with interest paid at the end of the year.​
You plan to save $5,000 per year for the first 5 years and $10,000 per year for the next 5 What is the effective annual rate difference between the two banks?​
years, with the first deposit one year from today. Additionally, your father has gifted you a. 0.25%​
$20,000 as a graduation present, which you will deposit immediately. If your savings earn b. 1.00%​
8% interest, how much will you have in 10 years when you start your business? c. 0.70%​
a. $116,110​ d. 0.50%
b. $185,976​ 18.​An investment offers an interest rate of 9%, compounded semi-annually. Another investment
c. $144,944​ with the same risk level is compounded quarterly. What nominal interest rate must the
d. $217,513 second investment have for you to be indifferent between the two choices?​
11.​You have an investment opportunity that costs $50,000 and provides cash flows as follows: a. 9.00%​
$5,000 at the end of year 1, $10,000 at the end of year 2, $15,000 at the end of year 3, and b. 8.71%​
an equal amount X from year 4 to year 7. If the expected return is 9%, find X. c. 8.90%​
a. $14,764.40​ d. 9.20%
b. $15,119.76​ 19.​Assume an investment provides the following cash flows: $2,000 per year from Year 1 to
c. $13,431.83​ Year 5; $3,000 per year from Year 6 to Year 8; and $4,000 in Year 9. Given that all cash
d. $10,158.58 flows are received at the end of each year and the discount rate is 14%, what is the present
12.​Mr. A takes out a 1-year loan of $100,000 with fixed monthly payments of $8,978. What value of these cash flows?​
percentage of the third payment consists of principal? a. $13,250​
a. 91.07%​ b. $9,851​
b. 89.06%​ c. $15,129​
c. 88.54%​ d. $11,714
d. 94.81% 20.​Two brothers, Việt and Tiến, are saving money to buy their own cars. Việt plans to save
13.​Which of the following statements is incorrect (assuming a positive interest rate)? $100 every time he receives his paycheck (he gets paid every two weeks). Tiến plans to save
a. The nominal interest rate of an investment is always equal to or greater than the effective interest $150 per month and has already saved $1,500 in his account. The listed interest rate is
rate.​ currently 10%. Việt’s bank compounds interest every two weeks, while Tiến’s bank
b. The monthly payment for a 15-year $100,000 mortgage is higher than for a 30-year mortgage of compounds interest monthly. At the end of the second year, both will use their savings to
the same amount.​ buy a car (each buying one car). What is the most expensive car they can afford?
c. If a savings account has a 10% interest rate, compounded annually, the effective annual rate is a. $5,797.62
also 10%.​ b. $5,744.29
d. The present value of an annuity due (payments at the beginning of the period) over 5 years with c. $5,807.48
$100 per period is greater than the present value of an ordinary annuity with the same terms. d. $5,898.50
14.​Which savings method has the highest effective annual rate? CHAPTER 3
a. 9% interest rate, compounded monthly​ 1.​ Company A recently announced that its net profit for Q2 increased compared to Q1 (of the
b. 10% interest rate, compounded monthly​ same year), but its net cash flow decreased. Which of the following could explain this
c. 10% interest rate, compounded daily​ result?​
d. 9% interest rate, compounded daily a. The company’s interest expense increased.​
15.​You have a savings account with an 8% nominal interest rate, compounded quarterly. Which b. The company’s depreciation expense decreased.​
statement is correct? c. The company’s operating profit decreased.​
a. The compounding period rate is 8%, and the effective annual rate is greater than 8%.​ d. The company’s depreciation expense increased.​
b. The compounding period rate is 2%, and the effective annual rate is 4%.​ e. The company’s revenue decreased.
c. The compounding period rate is 8%, and the effective annual rate is 8%.​ 2.​ Company B's retained earnings on its balance sheet were $800 million in 2018 and
d. The compounding period rate is 2%, and the effective annual rate is greater than 8%. remained $800 million in 2019. Which of the following statements is most accurate?​
16.​Which of the following statements is incorrect? a. The company had zero taxable income in 2019.​
a. If a loan has a 10% nominal interest rate, the effective annual rate cannot be lower than 10%.​ b. If the company’s net income in 2019 was $100 million, then the dividend payout in 2019
b. An investment that compounds semi-annually with a 10% nominal rate has an effective annual was also $100 million.​
rate lower than 10%.​ c. If the company incurred a loss in 2019, it still paid dividends in 2019.​
 d. The company's net income in 2019 was zero.​
e. The company did not pay dividends in 2019.
3.​ Calculate the total operating capital (TOC) for a company with the following balance
sheet:

​
a. $100​
b. $120​
c. $60​
d. $80​
e. $90
a. $200​
b. $120​ 6.​ Calculate the net working capital (NWC) for a company with the following balance sheet:
c. $150​
d. $90​
e. $230
4.​ Company B has a total net operating capital of $20 million and a weighted average cost of
capital (WACC) of 10%. Calculate the company's Economic Value Added (EVA) based on
the following income statement (in million USD):

​
a. $230​
b. $60​
c. $130​
d. $100​
e. $40
a. $4,000,000​
7.​ Company C estimates its income statement as follows: Assume all company revenue is
b. $2,000,000​
received in cash, and the company’s only non-cash operating expense is depreciation. If
c. -$800,000​
Congress passes a law allowing companies to use accelerated depreciation, then Company
d. $1,200,000​
C’s depreciation expense would increase to $8,000,000 (instead of $5,000,000). Assuming
e. $400,000
all other factors remain constant, calculate Company C's net cash flow under accelerated
5.​ Calculate the net operating profit after taxes (NOPAT) for a company with the following
income statement:
 Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest
expense is $1,500,000. What was the company's net income for the year?
a. $5,100,000
b. $8,386,100
c. $5,610,000
d. $4,385,100
e. $3,450,175
10.​Bates Motors has the following information for the previous year: Net income = $200; Net
operating profit after taxes (NOPAT) = $300; Total assets = $1,000; and Total net operating
capital = $800. The information for the current year is: Net income = $500; Net operating
profit after taxes (NOPAT) = $400; Total assets = $1,300; and Total net operating capital =
$900. What is the free cash flow for the current year?
a. $100
b. $200
depreciation.​ c. $400
a. $4,000,000​ d. $500
b. $2,000,000​ e. $300
c. $8,000,000​ CHAPTER 4
d. $6,800,000​ 1.​ Company B has total assets of $5 million, of which debt is $1 million and $4 million is
e. $9,800,000 equity. The company has a summarized financial statement as follows:
8.​ Hebner Housing Corporation has forecast the following numbers for this upcoming year Earnings Before Interest and Taxes (EBIT): $1,000,000​
Interest Expense: $100,000​
Earnings Before Tax (EBT): $900,000​
Tax (40%): $360,000​
Net Profit: $540,000
The company wants to increase its total assets by $1 million and finance this additional asset by
issuing $1 million in new debt. This action will double the company's interest expense, but EBIT
will remain at 20% of total assets, and the tax rate will remain at 40%. If the company borrows $1
The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 million as stated, what will happen?
percent of its sales. That is, if the company's sales were to increase to $1.5 million, its cost a. The company's ROA will increase.​
of goods sold would increase to $900,000. The company's CEO is unhappy with the forecast b. The company's ROA will decrease.​
and wants the firm to achieve a net income equal to $240,000. Assume that Hebner's interest c. The company's net income will decrease.​
expense remains constant. In order to achieve this level of net income, what level of sales d. The company's net income will increase.​
will the company have to achieve? e. The company's ROE will remain unchanged.
a. $1,250,000 2.​ You have the following information about Company C and Company D:​
b. $750,000 • Both companies have the same total assets.​
c. $500,000 • Both companies have the same operating profit (EBIT).​
d. $400,000 • Both companies have the same tax rate.​
e. $1,000,000 • Company C has a higher debt ratio and higher interest expense than Company D.​
9.​ Moose Industries faces the following tax schedule • Company C has a lower profit margin than Company D.
Based on the above information, which of the following statements is most accurate?
a. Company C must have a lower ROE.​
b. Company C must have higher revenue.​
c. Company C must have a higher interest coverage ratio.​
d. Company C must have a lower ROA.​
e. Company C must have a higher basic earning power (BEP) ratio.
3.​ Last year, Company A's retained earnings on its balance sheet were $400,000. This year, the
company's earnings per share (EPS) are $3, and dividends per share (DPS) are $1. The
company has 200,000 outstanding shares. What are the retained earnings on the company's
balance sheet this year?
a. $400,000​
b. $600,000​
 c. $500,000​ d. a​
d. $800,000​ e. e
e. $700,000 CHAPTER 5
4.​ Last year, Company Tel had a current ratio of 1.2, a quick ratio of 0.8, and short-term 1.​ Stock A and stock B both have an expected return of 15%, a standard deviation of 20%, and
liabilities of $500,000. Which of the following statements is most accurate? a beta of 1.2. The returns of the two stocks are not perfectly correlated, with a correlation
a. The company’s inventory last year was $200,000.​ coefficient of 0.6. You have an investment portfolio consisting of 50% stock A and 50%
b. If the company borrows $500,000 in short-term debt and uses the proceeds to purchase stock B. Which of the following statements is most accurate?
inventory, its current ratio will decrease.​ a. The expected return of the portfolio is less than 15%.​
c. The company’s current assets last year were $416,667. b. The expected return of the portfolio is 15%.​
5.​ Which of the following statements is most accurate? c. The standard deviation of the portfolio is 20%.​
a. An increase in average collection period while revenue remains unchanged will generally lead to d. The standard deviation of the portfolio is greater than 20%.​
an increase in total asset turnover.​ e. The beta of the portfolio is less than 1.2.
b. Adjusting the debt-to-total-assets ratio is more important than adjusting inventory turnover to 2.​ You are an investor in stocks and currently hold a well-diversified portfolio with an
reflect seasonal changes in company operations.​ expected return of 12%, a beta of 1.2, and a total value of $9,000. You plan to expand your
c. An increase in the debt ratio, with no change in revenue and operating costs, will cause the net portfolio by purchasing 100 shares of ABC stock at $10 per share. ABC has an expected
profit margin to decrease.​ return of 20% and a beta of 2. Calculate the expected return and beta of the portfolio after
d. An increase in the average collection period, holding other factors constant, will cause ROE to purchasing ABC stock.
increase. a. r = 20.0%; b = 2.00​
6.​ Which of the following activities will increase a company’s quick ratio? b. r = 12.0%; b = 1.20​
a. Issuing equity and using the proceeds to buy inventory.​ c. r = 13.2%; b = 1.40​
b. Taking on long-term debt and using the proceeds to buy fixed assets.​ d. r = 14.0%; b = 1.32​
c. Reducing inventory and using the proceeds to pay down short-term debt.​ e. r = 12.8%; b = 1.28
d. Taking on short-term debt and using the proceeds to buy inventory.​ 3.​ Stock X has a beta of 1.6, while stock Y has a beta of 0.7. The risk-free rate is 7%, and the
e. Reducing inventory and using the proceeds to pay down long-term debt. required return for an average stock is 12%. Currently, the expected inflation rate increases
7.​ When a company’s profits and revenue increase, ______ decreases, assuming other factors by 1%, the real risk-free rate remains unchanged, and the required return on the market rises
remain constant. to 14%, while beta remains unchanged. By how much will the required return of stock X be
a. Gross profit​ higher than that of stock Y?
b. Interest coverage ratio​ a. 3.75%​
c. Basic earning power (BEP) ratio​ b. 5.40%​
d. P/E ratio​ c. 4.82%​
e. Return on total assets ratio d. 4.20%​
8.​ Which of the following ratios reflects a company’s liquidity? e. 5.75%
a. TIE​ 4.​ The coefficient of variation is a better measure of risk than standard deviation when the
b. DSO​ expected returns of the securities being compared differ significantly.
c. ROIC​ a. True​
d. Current ratio​ b. False
e. BEP 5.​ According to the Capital Asset Pricing Model (CAPM), investors primarily care about
9.​ A company has a debt-to-equity ratio of 50%. Currently, the company has interest expenses portfolio risk rather than the individual risk of stocks. Therefore, the relevant risk is the
of $500,000 on total debt of $5,000,000, with a corporate income tax rate of 40%. If the contribution of an individual stock to the overall portfolio risk.
company's ROA is 6.0%, by how much is its ROE higher than its ROA? a. True​
a. 5.2%​ b. False
b. 9.0%​ 6.​ Diversifying a portfolio reduces the variability of returns on each security held within the
c. 7.4%​ portfolio. Choose one:
d. 0.0%​ a. True​
e. 3.0% b. False
10.​If you are a short-term creditor of a company, you are concerned about the company's ability 7.​ Risk aversion implies that some securities will not be purchased in the market even if a large
to repay its debt to you. Therefore, which of the following values would you prefer the risk premium is paid to investors. Choose one:
company to have? a. True​
a. d​ b. False
b. c​ 8.​ Portfolio A contains only one security, while Portfolio B consists of 100 securities. Due to
c. b​ diversification, Portfolio B will have lower market risk, meaning Portfolio B will have a
lower beta. Choose one:
a. True​ discounting those cash flows at the firm's weighted average cost of capital. Which of the
b. False following factors should be included in the project's cash flow estimates?
9.​ If I am certain that the market will generate positive returns next year, then to maximize a. Sunk costs related to the project, but only if they were incurred before the current year.
returns, I should increase the beta of my portfolio. Choose one: b. All sunk costs related to the project.
a. True​ c. All interest expenses on loans used to finance the project.
b. False d. The project's impact on other divisions of the company, but only if those impacts reduce the
10.​Any change in beta is likely to affect the required return on a security, which implies that project's direct cash flows.
changes in beta may impact the price of the security. Choose one: e. The additional investment in net working capital required to operate the project, even if this
a. True​ investment will be recovered in cash at the end of the project's life.
b. False 6.​ Which of the following should be considered when a company estimates the cash flows used
CHAPTER 6-7 for investment project analysis?
1.​ Projects C and D are mutually exclusive and have conventional cash flows. If the WACC is a. The company spent $10 million on market research before analyzing and evaluating whether to
less than 12%, Project C has a higher NPV. If the WACC is greater than 12%, Project D has accept or reject the project.
a higher NPV. Which of the following statements is correct? b. The company spent $1 million on research and development related to the new project.
a. Project C may have a shorter payback period. c. Since last year, the company’s capital budget director spent part of her time evaluating the new
b. Project D may be larger in scale than Project C. project, so part of her salary for that year should be included in the project’s initial investment cost.
c. The crossover discount rate of the two projects is less than 12%. d. The new project is expected to reduce revenue from one of the company’s existing products by
d. Project D may have a higher IRR. 5%.
e. Project C may have a higher IRR. e. The company will finance the new project entirely with debt, and the interest expense on this debt
2.​ Which of the following statements is correct? will be $1.5 million per year.
a. If the NPV of a project is negative, then the project's IRR must also be negative. 7.​ Which of the following is INCORRECT? For a company (which is profitable), when
b. If a project has conventional cash flows and an IRR lower than the WACC, then the project must comparing the MACRS accelerated depreciation method with the straight-line depreciation
have a positive NPV. method, using the MACRS accelerated depreciation method will lead to:
c. If Project A has a higher IRR than Project B, then Project A must have a higher NPV than Project
B. a. Larger cash flows in the early years of the asset’s life.
d. If a project has conventional cash flows and an IRR greater than the WACC, then the project b. Lower income taxes in the early years of the asset’s life.
must have a positive NPV. c. Lower accounting profits in the early years.
e. A project's MIRR cannot be greater than its IRR. d. Higher depreciation expenses in the early years of the asset’s life.
3.​ Which of the following statements is correct? e. The total (undiscounted) sum of operating cash flows over the years will be higher.
a. The MIRR method assumes that cash flows are reinvested at the crossover discount rate. 8.​ Company A is evaluating a new project with the following data. The required equipment has
b. One reason why some prefer the MIRR criterion over IRR is that MIRR is based on a more a depreciation life of 3 years, and the MACRS depreciation rates are 33%, 45%, 15%, and
reasonable reinvestment rate assumption. 7% for years 1 through 4, respectively. Revenue and other operating costs are expected to
c. The decision criteria for MIRR and NPV can never conflict. remain constant over the 10-year life of the project. Calculate the project's Year 4 cash flow.
d. The higher the weighted average cost of capital (WACC), the shorter the discounted payback
period.
e. The IRR method does not encounter the problem of multiple IRRs, while the MIRR method may
encounter the problem of multiple IRRs.
4.​ Company A is evaluating a project with the following cash flows and a WACC of 12.50%.
What is the MIRR of the project?

a. $8,473
a. 20.66% b. $6,884
b. 16.67% c. $7,565
c. 12.83% d. $7,716
d. 13.33% e. $8,700
e. 15.00% 9.​ Company B is evaluating a new project with the following data. The equipment used in the
5.​ A company is evaluating a new project. The CFO plans to calculate the project's NPV by new project will be depreciated using the straight-line method over 3 years and will have
estimating the relevant cash flows for each year of the project's life (i.e., estimating the zero residual value. The company's net working capital remains unchanged. Revenue and
initial investment cost, annual operating cash flows, and terminal year cash flows), then other operating costs are expected to remain constant over the project's life. Calculate the
NPV of the project.
a. $34,828
b. $29,023
c. $33,377
d. $25,831
e. $22,928
10.​Company A is considering two mutually exclusive investment projects. Both projects
require an initial investment of $10,800 at t = 0.
Project X has a 2-year project life, with after-tax cash flows of $6,600 in Year 1 and $7,400 in Year
2. Additionally, Project X can be repeated at the end of Year 2 with no change in its cash flows.
Project Y has a 4-year project life, with after-tax cash flows of $4,300 at the end of each year.
Both projects have a WACC of 8%.
Using the replacement chain method, what is the NPV of the most profitable project?
a. $3,408
b. $3,442
c. $2,960
d. $3,339
e. $3,718