5813Spring08Solution

5813Spring08Solution - Midterm Exam Name CORPORATE...

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Midterm Exam Name CORPORATE VALUATION Spring 2008 Multiple Choice -- Circle the letter of the BEST answer (3 points each) 1. Which of the following statements is MOST correct about a stock which has a beta of 1.2? a. If the stock’s beta doubles, its expected return will double. b. If expected inflation increases 3%, the stock’s expected return will increase by 3%. c. If the market’s risk premium increases by 3%, then the stocks expected return will increase by 3%. d. All of the above are true. e. None of the above is true. 2. Project A has twice as much risk as the firm as a whole. The firm’s cost of capital is 12% and the risk-free rate is 5%. The firm can borrow long-term debt at 8%. The appropriate risk- adjusted discount rate for Project A is: a. 10% b. 13% c. 16% d. 19% e. None of the above 3. Which of the following statements is NOT true? a. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method. b. If IRR = k (cost of capital), then NPV = 0. c. The NPV can be negative if the IRR is positive. d. The NPV method is not affected by the multiple IRR problem. e. All of the above statements are true. 4. Which of the following statements is NOT correct? a. Sunk costs should be incorporated into capital budgeting decisions. b. Opportunity costs should be incorporated into capital budgeting decisions. c. Sales cannibalization effects should be considered in the capital budgeting decision. d. All of the above are correct. e. None of the above is correct. 5. Which of the following would increase the NPV of a project? a. A shift from MACRS to straight-line depreciation. b. Making the initial investment in the first year rather than spreading it over the first three years. c. A decrease in the discount rate due to a decrease in overall interest rates. d. The sale of the old machine in a replacement decision at a loss relative to book value rather than at a gain. e.
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5813Spring08Solution - Midterm Exam Name CORPORATE...

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