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1. If 2 projects are not mutually exclusive, then they are, by definition, independent projects.

True

False

2. All of the following are advantages of debt financing except which one?

Interest is a taxdeductible expense

It allows for the use of "other people's money" in financing a business

It results in loss of ownership control of the business.

The cost of debt financing is generally cheaper than equity financing.

Owners do not have to share the potential gains of the business, since debt only requires repayment of the amount owed.

3. In 10 years you will begin receiving $155 dollars per year in perpetuity from your grandparent's family trust fund (first payment is exactly 10 years from today). You consider these payments essentially risk free and have decided to discount them at a constant risk free rate of 6.5%. What is the present value today of these future cash flows? (Hint: draw a time line to illustrate exactly the cash flows for this problem.)

1353

2385

1270

146

1550

4. In which of the following situations would you get the largest benefit from diversifying your investment across two stocks?

there is perfect positive correlation.

there is perfect negative correlation.

there is modest positive correlation.

there is modest negative correlation.

there is not correlation.

5. Regarding expensing an asset's cost immediately versus capitalizing the cost and depreciating it over time: All else the same, given a choice, a tax paying firm would generally prefer to

capitalize the cost and depreciate, because this will make the current year's net income higher.

capitalize the cost and depreciate, because it is best to extend the depreciation tax shield into the future as much as possible.

expense the asset to capture the tax shield immediately and thereby maximize the present value of the tax shield.

expense the asset to maximize the current year's net income.

none of the above.

6. If a tax paying firm pays $100,00 in interest what is the after tax interest cost for firm assuming they are in a 40% tax bracket?

100,00 since interest is paid after taxes are paid and thus there is no tax shield

40,000 since there is a tax shield on interest

60,000 since there is a tax shield on interest

insufficient information to compute

7. A capital budgeting decision tool, such as NPV, IRR, etc. should consider (use)

all of the relevant cash flows

only some of the relevant cash flows

only the opportunity costs

only the operating cash flows

8. One needs an interest rate to be able to calculate an IRR.

True

False

9. If an investment has an NPV=0, then

this means the investor earned no money

this means the investor earned more than the required rate of return (i.e., cost of capital)

this means the investor earned less than the required rate of return (i.e., cost of capital)

this means the investor a return just equal to the required rate of return (i.e. the cost of capital rate at which the NPV was calculated)

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