Chapter 7: Net Present Value and Other Investment Rules
The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the
Cumulative cash flows Year 1 = $6,500
Chapter 16: Capital Structure: Basic Concepts
A table outlining the income statement for the three possible states of the economy is shown
below. The EPS is the net income divided by the 5,000 shares outstanding. The last row shows
Financial markets develop to accommodate
_ between individuals.
B. barter and lending
C. borrowing and lending
D. lending and trade
Which of the following is not true?
Financial markets ca
FINA 395/G - Assignment 2 Yanyan Zhai
Student Name: Yanyan Zhai
March 28, 2016
FINA 395/G - Assignment 2 Yanyan Zhai
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently
APR 5 Times per year equivalent to rc=21.89%
Q: APR 5 TIMES PER YEAR = APP 30 TIMES PER YEAR = 5.92%
(1 + APR/5)^5= (1+0.0592/5)^(30/5)
C) EAR = APR
365 TIMES PER Y
Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
To calculate the accounting breakeven, we first need to find the depreciation for each year. The depreciation is:
Depreciation = $724,000/8
Depreciation = $90,500 per year
And the accoun
Review: Time Value of Money
Valuation of stocks and bonds
Time value of money - review
Price: Zeros, Coupon, Consol
Holding period return
Stocks and the dividend discount model
D / r, D / ( r-g), Two stage growth
g = ROE * retentio
The duration of a bond is a function of the bond's
A. coupon rate.
B. yield to maturity.
C. time to maturity.
D. all of these.
E. none of these.
Ceteris paribus, the duration of a bond is positively correlated with the bond's
A. time t
Chapter 18: Valuation and Capital Budgeting for the Levered Firm
The maximum price that the company should be willing to pay for the fleet of cars with all-equity
funding is the price that makes the NPV of the transaction equal to zero. The NPV eq
Net present value of growth opportunities (standard form) one year
before first investment
r (1 + r ) T
Dividend discount model with two growth rates (standard form)
Div N +1
Div1 (1 + g1 ) r g 2
Chapter 7: Net Present Value and Other Investment Rules 7.1 a. The payback period is the time that it takes for the cumulative undiscounted cash inflows to equal the initial investment. Project A: Cumulative cash flows Year 1 = $6,500 = $6,500 Cumulative
FINA 395/1 AA Theory of finance 2
Classroom: MB S2-115
Date Due: Thursday, May 16 at 15:00
Directives: This assignment may be done individually or
in teams of maximum 3 students.
It is not necessary to type your
A T-bill pays 6 percent rate of return. Would risk-averse investors invest in a risky portfolio that pays 12
percent with a probability of 40 percent or 2 percent with a probability of 60 percent?
A. Yes, because they are rewarded with a r
Indirect costs of financial distress:
effectively limit the
amount of equity a firm
B. serve as an incentive to increase the financial leverage
C. include direct costs such as legal and accounting fees.
D. include the costs inc
A pure discount bond:
B. pays interest annually.
C. pays interest semiannually.
D. pays no coupon.
A level coupon bond:
pays the same
B. pays the same taxes every period.
C. is a zero cou
The term structure of interest rates is:
A. The relationship between the rates of interest on all securities.
B. The relationship between the interest rate on a security and its time to maturity.
C. The relationship between the yield on a
When a security is added to a portfolio the
appropriate return and risk contributions are:
the expected return of the
asset and its standard
B. the most probable return and the beta.
C. the expected return and the beta.
The acceptance of a capital budgeting project is
usually evaluated on its own merits. That is, capital
budgeting decisions are treated separately from
capital structure decisions. In reality, these
decisions may be highly interwoven. This
One of the key differences between corporate
finance and financial accounting courses is:
the focus on cashflows
instead of earnings.
B. the focus on marginal tax rates versus average tax rate
C. the role of total income flow versus inc
The firm's capital structure refers to:
the way a firm
B. the amount of equity or capital in the firm.
C. the amount of dividends a firm pays.
D. the way in which a firm's assets are financed.
E. how much cash the f
Chapter 6: How to Value Bonds and Stocks
6.1 The price of a pure discount (zero coupon) bond is the present value of the par. Remember, even though
there are no coupon payments, the periods are semiannual to stay consistent with coupon bond payments.
The NPV formula for risky projects evaluates
_ using the _.
riskless discount rate,
B. certain cashflows, riskless discount rate.
C. expected incremental cashflowsm riskless discount rate
D. certain cash
A $25 investment produces $27.50 at the end of
the year with no risk. Which of the following is not
NPV is positive if the
interest rate is less than
B. NPV is negative if the interest rate is less than 10%.
C. NPV is zero if
In an efficient market, the price of a security will:
B. react to new information over a two-day period after wh
related to that information will occur.
C. rise sharply when new information is first rel
An equity issue sold directly to the public is called:
B. a general cash offer.
C. a restricted placement.
D. a fully funded sales.
E. a standard call issue.
An equity issue sold to the firm's existing
The time value of money concept can be defined
the time in your life when
you receive an inheritance.
B. the relationship between money spent versus money re
C. the relationship between a dollar to be received in the fu
D. the relat
A derivative is a financial instrument whose value
is determined by:
such as the FTC.
B. a primitive or underlying asset.
C. hedging a risk
D. hedging a speculation.
Derivatives can be used to either hedge or
Problem Set II
FINA 395/Summer II
Chapters 7 & 8
Instructor: Ahmed Eissa
I. Multiple choice questions
1) Under capital rationing the profitability index is used to select investments
because of limited capital by their:
A) Capital usage rate to
Problem Set II Solutions
3) E 4) E
5) B 6) D
1) = 4.2% + 1.2(9.4% 4.2%) = 10.44%
= 150,000 + 10
The project should be accepted because it has a positive NPV. Using the financial cal