1.

As the required rate of return , the:

c) Profitability index 

2. Investment banks that act as intermediaries b/w companies-IPO:

b) undertake the issue on best efforts basis

3. Correct:
d) Once approved with a shelf prospectus firms have the right to sell new stocks
anytime then 25 months by providing investors with a prospectus supplement

1. Which of the following are true when a firm is operating at its target operating structure
point?
d) I, III, IV only:
WACC is at min
S/H value is max
Total value of firm is max

2. X company is considering a new project. The CFO plans to calculate the projects NPV by
estimating the relevant cash flows for each year of the projects life then discounting those cash
flows at the company’s WACC. Which amounts should the CFO include when estimating the
relevant cash flows?
b) the investment in working capital to operate the project, even if that investment will
be recovered at the end of the projects life

3. CNR is looking to expand. Bought land 7 years ago for $750,000. Fully paid for. Appraised last
week for $980,000. CNR now wants to build new rail yard. Facility will cost $1.5 million to build
site and requires $400,000 in grading is can be useful. Surveying, planning and legal, all costing
$90,000 have been completed. What would be the correct time 0 cash flow to use the purposes
of capital budgeting?
c) $2,800,000

4. Project X has internal rate of return of 16% while project Y is 12%. Risk adjusted discount rate
for X is 18% and Y is 10%. WACC is 14%. Should
c) Reject Project X and accept Project Y

5. Asset initial cost of $100,000 and no salvage value. Compute difference in PV of CCA. Tax is
30% and RRR 16%. Difference is:
b)$4129

6. Which of the following statements best describes private placements?

d) Can generally bring in funds faster than is the case with public offerings
7. Frank Edwards is considering a lease wherein they would be responsible, as lessee, for
providing the maintenance, taxes, insurance, and equipment. Given this, which one of the
following should be included in the lease purchase analysis?
e) The amount of CCA shield

8. Chart Project I and II. Min rate of return of 11%. What shoud company do and why?
d) Project I should be accepted b/c NPV of $3908.58

9. Edmans Electronics. What is MIRR? -800 350 350 350

d) 13.14%

10. Your firm engages. Sell 2 million $20 per share. 10%
c) $36.0 million

11. Which of the following does NOT influence project cash flows for capital budgeting
purposes?
d) Method of projecting financing used

12. A project has an up-front cost of $100,00. Wacc is 12%. NPV $10,000. Correct?
b) The projects internal rate of return is > than 12%

13. WACC 13% -1025 375 380 385 390

-2150 750 759 768 777
d) $6.46

14. Mathew Const. considering project that will cost $1.2 million. Cash flows in year 2 of
$269,000 for 6 years. What is IRR?
c) 6.97%

15. Correct? Normal cash flows:

a) the higher the WACC used to cal. NPV, the lower the calc. NPV will be

4. 2 Advantages & 2 Disadvantages of going public?

- Increases liquidity - potential loss of control
- establishes value for firm - inactive/low prices

5. In capital budgeting, when an investment in working capital is required at project start, the
analyst normally reverses the cash flow from working capital in the last year. What is the
rationale for reversing the working capital cash flow in the last year?
Investment in working cap. Due to  in A/R-Inventory is due to new project.
As project ends A/R is liquidated and not replaced.  in working capital will cash flows
to firm.
6. Briefly give two explantions why NPV is superior to the Internal Rate of Return (IRR)
method?
1. NPV  wealth
2. NPV can handle normal cash flows IRR CAN NOT
3. NPV can handle scale differences
4. NPV can handle cash flow timing differences

7. Briefly compare and contrast an “underwriting” from a “best efforts” offering. What type of
company might sell securities through a best efforts basis?
Underwriting: investment bank agrees to buy entire issue and resell to its customers
guaranteed
Best Efforts: investment bank does not buy the issue but rather acts as an agent to try to
to sell the issue; used by small unknown companies

8. Would companies usually prefer the government to increase or decrease CCA rates on capita
equipment? Why or why not?
 b/c allows companies to obtain greater tax savings earlier
Making PV of CCA tax shield more valuable

9. The NPV, IRR, MIRR and PI methods will always lead to the same accept/reject decisions for
independent projects. Agree or Disagree, why.
Agree- if projects NPV > 0
PI > 1
IRR & MIRR> cost of capital