PHIINMA – UNIVERSITY OF PANGASINAN

FIN 072 FINANCIAL MARKETS

MOCK PHINMA EXAMS

GENERAL INSTRUCTIONS: No examinees shall copy or refer to any solution,

answer or work of another or allow anyone to copy or refer to his work, nor in
any manner help or ask the help of any person or communicate with any
person by means of words, signs, gestures, codes, and other similar acts
which may enable him to exchange, impart or acquire relevant information
while the examination is in progress. Select the correct answer by shading the
letter of your choice on the answer sheet. STRICTLY NO ERASURES.

1.Mata Bank pays an 8% nominal rate of interest which is compounded quarterly.

Which of the following statements is correct?
A. The periodic rate of interest is 4% and the effective rate of interest is less than
8%
B. The periodic rate of interest is 2% and the effective interest rate is greater than
8%
C. The periodic rate of interest is 2% and the effective interest is 4%
D. The periodic rate of interest is 8% and the effective rate is greater than 8%.
2. An agreement in which an investment banker sells the securities of an issuing
corporation, but assumes no risk if the floatation is unsuccessful is called a
A. Due-diligence agreement
B. Shelf registration agreement
C. Firm commitment agreement
D. Best-effort agreement
3. Using a 7% discount rate with annual compounding, the present value of a single
₱4,500 payment to be received 8 years from now is
A. P2,619
B. P2,687
C. P7,731
D. P2,625
4. Using a 14% discount rate with annual compounding, the present value of 5 year-
end annual payments of ₱4,500 each is
A. P22,500
B. P29,745
C. P14,286
D. P15,449
5. Today is January 1. You have an investment account with a current balance of
₱10,000. The interest is 12% per year compounded monthly. Suppose you withdraw
exactly ₱1,260 on December 30 of each year and leave the rest of the money in the
account to gain interest. If you observe the account balance on December 31 of
each year, which of the following best describes the behavior of the account
balance over time?

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A. It will increase
B. It will remain unchanged
C. It will decrease
D. None of the above choices
6. Dave and Jane plans to save P1,000,000 for their child’s college education. They
plan to make fifteen equal annual year-end payments and expect to earn 8% annual
interest. How much will they have to invest annually to accumulate P1,000,000?
A. P25,420
B. P36,830
C. P61,390
D. P72,850
7. If you borrowed ₱120,000 and financed it at 10% annual interest for thirty years,
what is your annual mortgage payment assuming that you make equal year-end
payments?
A. ₱4,000
B. ₱6,527
C. ₱8,336
D. ₱12,729
8. What is the future value of ₱1,000 compounded annually at 8% for five years?
A. ₱1,080
B. ₱1,400
C. ₱1,469
D. ₱1,800
9. May would like to purchase a new Mercedes 450 SL that sells for ₱4,300,000. It
plans to take out a 4-year loan at a 12% annual rate. The most that May can afford
for monthly payments is ₱100,000 but it can sell its current car to raise additional
cash for down payment. What is the minimum amount that May can accept for its
current car and still be able to purchase the Mercedes?
A. ₱655,200
B. ₱502,600
C. ₱810,300
D. ₱303,700
10. If a bank pays a 12% nominal interest, what is the effective interest rate
assuming quarterly compounding?
A. 12%
B. 12.3%
C. 12.6%
D. 13%
11. What is the market risk premium if the risk free rate is 5 percent and the
expected market return is given as follows?
State of Nature Probability Return
Boom 20% 30%
Average 70% 15%

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Recession 10% -5%
A. 10.5%
B. 11.0%
C. 16.0%
D. 16.5%
12. What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an
expected return of 20 percent, and the expected market return is 15 percent?
A. 5.0%
B. 7.5%
C. 15.0%
D. 22.5%
13. ______ risk represents the portion of an asset’s risk that can be eliminated by
combining assets with less than perfect positive correlation.
A. Diversifiable
B. Nondiversifiable
C. Systematic
D. Total
14. The relevant portion of an asset’s risk attributable to market factors that affect
all firms is called
A. unsystematic risk.
B. diversifiable risk.
C. systematic risk.
D. None of the above.
15. Risk that affects all firms is called
A. Total risk.
B. Management risk.
C. Nondiversifiable risk.
D. Diversifiable risk.
16. The goal of an efficient portfolio is to
A. maximize risk for a given level of return.
B. maximize risk in order to maximize profit.
C. minimize profit in order to minimize risk.
D. minimize risk for a given level of return.
17. If the interest rate is zero, the future value interest factor equals_________.
A. –1.0
B. 0.0
C. 1.0
D. 2.0
18. As the interest rate increases for any given period, the future value interest
factor will
A. decrease.
B. increase.
C. remain unchanged.
D. move toward 1.

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19. The present value of $200 to be received 10 years from today, assuming an
opportunity cost of
10 percent, is
A. $ 50.
B. $200.
C. $518.
D. $ 77.
20. The future value of a PESO _________ as the interest rate increases and _________
the farther in the future an initial deposit is to be received.
A. decreases; decreases
B. decreases; increases
C. increases; increases
D. increases; decreases
21. An annuity with an infinite life is called a(n)
A. perpetuity.
B. primia.
C. indefinite.
D. deep discount.
22. A generous benefactor to the local ballet plans to make a one time endowment
which would provide the ballet with $150,000 per year into perpetuity. The rate of
interest is expected to be 5 percent for all future time periods. How large must the
endowment be?
A. $ 300,000
B. $3,000,000
C. $ 750,000
D. $1,428,571
23. James plans to fund his individual retirement account, beginning today, with 20
annual deposits of $2,000, which he will continue for the next 20 years. If he can
earn an annual compound rate of
8 percent on his deposits, the amount in the account upon retirement will be
A. $19,636.
B. $91,524.
C. $98,846.
D. $21,207.
24. The rate of interest agreed upon contractually charged by a lender or promised
by a borrower is the _________ interest rate.
A. effective
B. nominal
C. discounted
D. continuous
25. Gina has planned to start her college education four years from now. To pay for
her college education, she has decided to save $1,000 a quarter for the next four

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years in a bank account paying 12 percent interest. How much will she have at the
end of the fourth year?
A. $ 1,574
B. $19,116
C. $20,157
D. $16,000
26. The _________ is the annual rate of interest earned on a security purchased on a
given date and held to maturity.
A. term structure
B. yield curve
C. risk free rate
D. yield to maturity
27. _________ yield curve reflects lower expected future rates of interest.
A. An upward sloping
B. A flat
C. A downward sloping
D. A linear
28. The nominal rate of interest is composed of
A. the real rate plus an inflationary expectation.
B. the real rate plus a risk premium.
C. the risk free rate plus an inflationary expectation.
D. the risk free rate plus a risk premium.
29. The _________ rate of interest is typically the required rate of return on a three-
month Treasury bill.
A. nominal
B. real
C. risk free
D. premium
30. The cost of long term debt generally _________ that of short term debt.
A. is less than
B. is equal to
C. is greater than
D. has no relation to
31. A _________ is a restrictive provision on a bond which provides for the systematic
retirement of the bonds prior to their maturity.
A. redemption clause
B. sinking fund requirement
C. conversion feature
D. subordination clause
32. A _________ is a complex and lengthy legal document stating the conditions
under which a bond has been issued.

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A. bond debenture
B. warrant
C. sinking fund
D. bond indenture
33. _________ is a paid individual, corporation, or commercial bank trust department
that acts as a third party to a bond indenture to ensure that the issuer does not
default on its contractual responsibilities to the bondholders.
A. A trustee
B. An investment banker
C. A bond issuer
D. A bond rating agency
34. If a bond pays $1,000 plus interest at maturity, $1,000 is called the
A. stated value.
B. market value.
C. par value.
D. long-term value.
35. To compensate for the uncertainty of future interest rates and the fact that the
longer the term of a loan the higher the probability that the borrower will default,
the lender typically
A. charges a higher interest rate on long term loans.
B. reserves the right to change the terms of the loan at any time.
C. includes excessively restrictive debt provisions.
D. reserves the right to demand immediate payment at any time.
36. A firm has an issue of $1,000 par value bonds with a 12 percent stated
interest rate outstanding. The issue pays interest annually and has 10 years
remaining to its maturity date. If bonds of similar risk are currently earning 8
percent, the firm’s bond will sell for _________ today.
A. $1,000
B. $805.20
C. $851.50
D. $1,268.20
37. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14
percent annual coupon interest rate. The issue has ten years remaining to the
maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of
return. The current value of each Hewitt bond is _________.
A. $791.00
B. $1,000
C. $1,052.24
D. $1,113.00
38. A bond will sell _________ when the stated rate of interest exceeds the required
rate of return, _________ when the stated rate of interest is less than the required
return, and _________ when the stated rate of interest is equal to the required return.

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A. at a premium; at a discount; equal to the par value
B. at a premium; equal to the par value; at a discount
C. at a discount; at a premium; equal to the par value
D. equal to the par value; at a premium; at a discount
39. Al is trying to decide which of two bonds to buy. Bond H is a 10 percent coupon,
10 year maturity, $1,000 par, January 1, 2000 issue paying annual interest. Bond F
is a 10 percent coupon, 10 year maturity, $1,000 par, January 1, 2000 issue paying
semiannual interest. The market required return for each bond is 10 percent. When
using present value to determine the prices of the bonds, Al will find that
A. there is no difference in price.
B. the price of F is greater than H.
C. the price of H is greater than F.
D. he needs more information before determining the prices.
40. Jia Hua Enterprises wants to issue sixty 20-year, $1,000 par value, zero-coupon
bonds. If each bond is priced to yield 7 percent, how much will Jia Hua receive
(ignoring issuance costs) when the bonds are first sold?
A. $11,212
B. $12,393
C. $15,505
D. $18,880
E. $20,000
41. The claims of the equity holders on income have priority over
A. the claims of the preferred stockholders.
B. the claims of the creditors.
C. the claims of the unsecured creditors.
D. no one.
42. An 8 percent preferred stock with a market price of $110 per share and a $100
par value pays a cash dividend of _________.
A. $4.00
B. $8.00
C. $8.80
D. $80.00
43. Key differences between common stock and bonds include all of the following
except.
A. Common stockholders have a voice in management; bondholders do not.
B. Common stockholders have a senior claim on assets and income relative to
bondholders.
C. Bonds have a stated maturity but stock does not.
D. Interest paid to bondholders is tax-deductible but dividends paid to stockholders
are not.
44. You are planning to purchase the stock of Ted’s Sheds Inc. and you expect it to
pay a dividend of $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You expect to

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sell the stock for $100 in 3 years. If your required return for purchasing the stock is
12 percent, how much would you pay for the stock today?
A. $75.45
B. $77.24
C. $81.52
D. $85.66

45. Zack is considering purchasing the stock of Pepsi Cola because he really loves
the taste of Pepsi. What should Zack be willing to pay for Pepsi today if it is
expected to pay a $2 dividend in one year and he expects dividends to growth at 5
percent indefinitely? Zack requires a 12 percent return to make this investment.
A. $28.57
B. $29.33
C. $31.43
D. $43.14
46. Jia’s Fashions recently paid a $2 annual dividend. The company is projecting
that its dividends will grow by 20 percent next year, 12 percent annually for the two
years after that, and then at 6 percent annually thereafter. Based on this
information, how much should Jia’s Fashions common stock sell for today?
A. $54.90
B. $60.80
C. $66.60
D. $69.30
47. Stock rights provide the stockholder with
A. certain purchase privileges of additional stock shares in direct proportion based
on their number of owned shares.
B. the right to elect the board of directors.
C. cumulative voting privileges.
D. the opportunity to receive extraordinary earnings.
48. The preemptive right gives the shareholder the right
A. of one vote for each share owned.
B. to give up their vote to another party.
C. to maintain their proportionate ownership in the corporation when new common
stock is issued.
D. to sell their share of stock at a premium.
49. The _________ is the rate of return a firm must earn on its investments in projects
in order to maintain the market value of its stock.
A. net present value
B. cost of capital
C. internal rate of return
D. gross profit margin

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50. The _________ from the sale of a security are the funds actually received from
the sale after _________, or the total costs of issuing and selling the security, which
have been subtracted from the total proceeds.
A. gross proceeds; the after-tax costs
B. gross proceeds; the flotation costs
C. net proceeds; the flotation costs
D. net proceeds; the after-tax costs
51. A firm has issued preferred stock at its $125 per share par value. The stock will
pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per
share. The cost of the preferred
stock is
A. 7.2 percent.
B. 12 percent.
C. 12.4 percent.
D. 15 percent.
52. If a corporation has an average tax rate of 40 percent, the approximate, annual,
after-tax cost of debt for a 15-year, 12 percent, $1,000 par value bond, selling at
$950 is
A. 10 percent.
B. 10.6 percent.
C. 7.6 percent.
D. 6.0 percent.
53. Debt is generally the least expensive source of capital. This is primarily due to
A. fixed interest payments.
B. its position in the priority of claims on assets and earnings in the event of
liquidation.
C. the tax deductibility of interest payments.
D. the secured nature of a debt obligation.
54. The cost of new common stock financing is higher than the cost of retained
earnings due to
A. flotation costs and underpricing.
B. flotation costs and overpricing.
C. flotation costs and commission costs.
D. commission costs and overpricing.
55. A firm has common stock with a market price of $55 per share and an expected
dividend of $2.81 per share at the end of the coming year. The dividends paid on
the outstanding stock over the past five years are as follows:
Year Dividend
1 $2.00
2 2.14
3 2.29
4 2.45
5 2.62

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The cost of the firm’s common stock equity is
A. 4.1 percent.
B. 5.1 percent.
C. 12.1 percent.
D. 15.4 percent.

56. In comparing the constant growth model and the capital asset pricing model
(CAPM) to calculate the cost of common stock equity,
A. the constant growth model ignores risk, while the CAPM directly considers risk as
reflected in the beta.
B. the CAPM directly considers risk as reflected in the beta, while the constant
growth model uses the market price as a reflection of the expected risk-return
preference of investors.
C. the CAPM directly considers risk as reflected in the beta, while the constant
growth model uses dividend expectations as a reflection of risk.
D. the CAPM indirectly considers risk as reflected in the market return, while the
constant growth model uses dividend expectations as a reflection of risk.

57. Weighing schemes for calculating the weighted average cost of capital include
all of the following EXCEPT
A. book value weights.
B. optimal value weights.
C. market value weights.
D. target weights.

58. A firm has determined its cost of each source of capital and optimal capital
structure, which is composed of the following sources and target market value
proportions:

Target
Source of Capital Market After-Tax
Proportion Cost
s
Long-term debt 40% 6%
Preferred stock 10 11
Common stock 50 15
equity

The weighted average cost of capital is

A. 6 percent.
B. 10.7 percent.
C. 11 percent.
D. 15 percent.

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USE THE FOLLOWING DATA FOR NUMBERS 59 TO 64

A firm has determined its optimal capital structure which is composed of the
following sources and target market value proportions.
Table 11.1
Target
Source of Capital Market
Proportion
s
Long-term debt 20%
Preferred stock 10
Common stock 70
equity

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960.
A flotation cost of
2 percent of the face value would be required in addition to the discount of
$40.
Preferred Stock: The firm has determined it can issue preferred stock at $75
per share par value. The stock will pay a $10 annual dividend. The cost of
issuing and selling the stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share.
The dividend expected to be paid at the end of the coming year is $1.74. Its
dividend payments have been growing at a constant rate for the last four
years. Four years ago, the dividend was $1.50. It is expected that to sell, a new
common stock issue must be underpriced $1 per share in floatation costs.
Additionally, the firm’s marginal tax rate is 40 percent.

59. The firm’s before-tax cost of debt is

A. 7.7 percent.
B. 10.6 percent.
C. 11.2 percent.
D. 12.7 percent.
60. The firm’s after-tax cost of debt is
A. 3.25 percent.
B. 4.6 percent.
C. 8 percent.
D. 8.13 percent.
61. The firm’s cost of preferred stock is
A. 7.2 percent.
B. 8.3 percent.
C. 13.3 percent.
D. 13.9 percent.

62. The firm’s cost of a new issue of common stock is

A. 7 percent.
B. 9.08 percent.
C. 13.2 percent.
D. 14.4 percent.

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63. The firm’s cost of retained earnings is
A. 10.2 percent.
B. 13.9 percent.
C. 12.4 percent.
D. 13.6 percent.

64. The weighted average cost of capital after all retained earnings are exhausted is
(See Table 11.1.)
A. 13.6 percent.
B. 11.0 percent.
C. 11.55 percent.
D. 10.4 percent.

65. What is the payback period for Tangshan Mining company’s new project if its
initial after tax cost is $5,000,000 and it is expected to provide after-tax operating
cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and
$1,800,000 in year 4?
A. 4.33 years.
B. 3.33 years.
C. 2.33 years.
D. None of the above.

66. Should Tangshan Mining company accept a new project if its maximum payback
is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide
after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2,
$700,000 in year 3 and $1,800,000 in year 4?
A. Yes.
B. No.
C. It depends.
D. None of the above.

67. What is the NPV for the following project if its cost of capital is 15 percent and
its initial after tax cost is $5,000,000 and it is expected to provide after-tax
operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in
year 3 and $1,300,000 in year 4?
A. $1,700,000
B. $371,764
C. ($137,053)
D. None of the above

68. What is the NPV for the following project if its cost of capital is 0 percent and its
initial after tax cost is $5,000,000 and it is expected to provide after-tax operating
cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3
and $1,300,000 in year 4?
A. $1,700,000.
B. $371,764.
C. $137,053.
D. None of the above.

69. What is the NPV for the following project if its cost of capital is 12 percent and
its initial after tax cost is $5,000,000 and it is expected to provide after-tax

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operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in
year 3 and ($1,300,000) in year 4?
A. $(1,494,336).
B. $1,494,336.
C. Greater than zero.
D. Two of the above.

70. What is the IRR for the following project if its initial after tax cost is $5,000,000
and it is expected to provide after-tax operating cash flows of ($1,800,000) in year
1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
A. 5.83%.
B. 9.67%.
C. 11.44%.
D. None of the above.

71. What is the IRR for the following project if its initial after tax cost is $5,000,000
and it is expected to provide after-tax operating cash inflows of $1,800,000 in year
1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
A. 15.57%.
B. 0.00%.
C. 13.57%.
D. None of the above.

72. Which capital budgeting method is most useful for evaluating the following
project? The project has an initial after tax cost of $5,000,000 and it is expected to
provide after-tax operating cash flows of $1,800,000 in year 1, ($2,900,000) in year
2, $2,700,000 in year 3 and $2,300,000 in year 4?
A. NPV.
B. IRR.
C. Payback.
D. Two of the above.

73. 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 should the firm choose if the cost of capital is 10
percent?
A. Project X.
B. Project Y.
C. Neither.
D. Not enough information to tell.

74. If a proposal's profitability index is greater than one:

A. the net present value is negative.
B. the net present value is positive.
C. the net present value is zero.
D. the proposal should be rejected.

75. A major difference between an investment in working capital and one in

depreciable assets is that
A. an investment in working capital is never returned, while most depreciable assets
have some residual value.

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B. an investment in working capital is returned in full at the end of a project’s life,
while an investment in depreciable assets has no residual value.
C. an investment in working capital is not tax-deductible when made, nor taxable
when returned, while an investment in depreciable assets allow tax deductions.
D. because an investment in working capital is usually returned in full at the end of
the project’s life, it is ignored in computing the amount of the investment required
for the project.

76. In eight years, Larson Company plans to receive P11,000 cash from the sale of a
machine that has a P16,000 book value. If the company is subject to a 30% income
tax rate and has a 12% after-tax hurdle rate, the correct discounted net cash flow
would be:
A. P606.
B. P1,414.
C. P3,838.
D. P5,050.

77. Regal Industries is replacing a grinder purchased 5 years ago for P15,000 with a
new one costing 25,000. The original grinder is being depreciated on a straight-line
basis over 15 years to a zero residual value. Regal will sell this old equipment to a
third party for P6,000 cash. The new equipment will be depreciated on a straight-
line basis over 10 years to a zero residual value. Assuming a 40% marginal tax rate,
what is Regal’s net cash investment on the new grinder?
A. P19,000
B. P15,000
C. P17,400
D. P25,000

78. Wakefield evaluates future projects by using the profitability index. The
company is currently reviewing five similar projects and must choose one of the
following:

Project Initial Present value

Investment of cash inflows
1 P100,000 P 97,000
2 50,000 80,000
3 75,000 110,000
4 60,000 100,000

Which project should Wakefield select if the decision is based entirely on the
profitability index?
A. Project 1.
B. Project 2.
C. Project 3.
D. Project 4.

79. St. Andrews ranks investments by using the profitability index (PI). The
following data relate to Project X and Project Y:

Project X Project Y
Initial investment P400,000 P1,300,000

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Present value of inflows 600,000 1,800,000

Which project would be more attractive as judged by its ranking, and why?
A. Project X because the PI is 1.50.
B. Project Y because the PI is 1.38.
C. Project X because the PI is 0.67.
D. Project Y because the PI is 0.72.

80. Pick Company received P18,000 cash from the sale of a machine that had a
P13,000 book value. If the company is subject to a 30% income tax rate, the net
cash flow to be used in a discounted-cash-flow analysis would be:
A. P3,500.
B. P6,500.
C. P12,600.
D. P16,500.

81. Capital-budgeting decisions primarily involve:

A. emergency situations.
B. long-term decisions.
C. short-term planning situations.
D. cash inflows and outflows in the current year.

Questions 82 and 83 are based on the following information: Pearl Company is

planning to buy a coin-operated machine costing P40,000. This machine will be
depreciated over a five-year period using the straight-line method and has no
salvage value. Pearl estimates that this machine will yield an annual net operating
income of P12,000. Pearl’s desired rate of return on its investment is 12%.

82. Pearl’s simple rate of return on its initial investment in this machine is expected
to be
A. 30%
B. 15%
C. 12%
D. 10%

83. Pearl’s expected payback period for its investment in this machine is
A. 2 years
B. 3 years
C. 4 years
D. 5 years

84. In choosing from among mutually exclusive investments, the manager should
normally select the one with the highest:
A. Net present value
B. Internal rate of return
C. Profitability index
D. Accounting rate of return

85. According to the reinvestment rate assumption, which method of capital

budgeting assumes cash flows are reinvested at the project’s rate of return?
A. payback period
B. internal rate of return

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C. net present value
D. none of the above

Question Nos. 86 to 88 are based on the following data:

The management of Arleen Corporation is considering the purchase of a new
machine costing P400,000. The company’s desired rate of return is 10%. The
present value of P1 at compound interest of 10% for 1 through 5 years are 0.909,
0.826, 0.751, 0.683, and 0.621, respectively, and the present value of annuity of 1
for 5 periods at 10 percent is 3.79. In addition to the foregoing information, use
the following data in determining the acceptability in this situation:

Year Income from Net Cash Flow

Operations
1 P100,000 P180,000
2 40,000 120,000
3 20,000 100,000
4 10,000 90,000
5 10,000 90,000

86. The net present value for this investment is:

A. Positive 36,400
B. Negative 99,600
C. Positive 55,200
D. Negative 126,800

87. The present value index for this investment is:

A. 0.88
B. 1.14
C. 1.45
D. 0.70

88. The cash payback period for this investment is:

A. 4 years
B. 2 years
C. 5 years
D. 3 years

89. Mutually exclusive projects are those that

A. If accepted, preclude the acceptance of competing projects
B. If accepted, can have a negative effect on the company’s profit
C. If accepted, can also lead to the acceptance of a competing project
D. have high returns

90. A capital investment decision is essentially a decision to:

A. exchange current assets for current liabilities.
B. exchange current cash outflows for the promise of receiving future cash inflows.
C. exchange current cash flow from operating activities for future cash inflows from
investing activities.
D. exchange current cash inflows for future cash outflows.

91. In equipment replacement decisions, which one of the following does not affect
the decision-making process?

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A. Current disposal price of the old equipment
B. Operating costs of the old equipment
C. Original costs of the old equipment
D. Operating costs of the new equipment

92. A capital budgeting method that provides a rough approximation of an

investment’s profitability:
A. Average rate of return method
B. Net present value method
C. Payback period method
D. Internal rate of return method

93. A disadvantage of the net present value method of capital expenditure

evaluation is that it
A. is difficult to apply because it uses a trial-and-error approach
B. does not provide the true rate of return on investment
C. is calculated using sensitivity analysis
D. computes the true rate of return

94. If the net present value of a proposed project is negative, the discount rate must
be
A. less than the project’s internal rate of return
B. less than the risk free rate
C. greater than the firm’s cost of equity
D. greater than the project’s internal rate of return

95. It is the technique that recognizes the time value of money by discounting the
after-tax cash flows for a project over its life to time period zero using the
company’s minimum desired rate of return.
A. Net present value method
B. Internal rate of return method
C. Payback method
D. Accounting rate of return

96. The internal rate of return is the

A. Rate of return for which the net present value is greater than 1.0
B. Rate of return for which the net present value is equal to zero
C. Rate of return generated from the operational cash flows
D. Rate equal to hurdle rate

97. If an investment project has a profitability index of 1.15, the

A. Project’s internal rate of return is 15%
B. Project’s cost of capital is greater than its internal rate of return
C. Projects internal rate of return exceeds its net present value
D. Net present value of the project is positive

98. Capital-budgeting decisions primarily involve:

A. emergency situations.
B. long-term decisions.
C. short-term planning situations.
D. cash inflows and outflows in the current year.

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99. In a net-present-value analysis, the discount rate is often called the:
A. payback rate.
B. hurdle rate.
C. minimal value.
D. net unit rate.

100. Consider the following factors related to an investment:

I. The net income from the investment.
II. The cash flows from the investment.
III. The timing of the cash flows from the investment.

Which of the preceding factors would be important considerations in a net-present-

value analysis?
A. I only.
B. II only.
C. I and II.
D. II and III.

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