1. Which one of the following statements concerning net present value (NPV) is correct?

a.An investment should be accepted if, and only if, the NPV is exactly equal to zero.
b.An investment should be accepted only if the NPV is equal to the initial cash flow.
c.An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur,
will always have a positive NPV and therefore should always be accepted.
d.An investment should be accepted if the NPV is positive and rejected if it is negative.
e.Any project that has positive cash flows for every time period after the initial investment should be
accepted.

2. Which of the following statements is incorrect regarding internal rate of return of a project?
a. Instead of asking whether a project has a positive NPV, many businesses prefer to ask whether it offers
a higher return than shareholders could expect to get by investing in the capital market.

b. Return is usually defined as the discount rate that would result in a zero NPV. This is known as the
internal rate of return, or IRR. The project is attractive if the IRR exceeds the opportunity cost of capital.

c. There are some pitfalls in using the internal rate of return rule. Be careful about using the IRR when (1)
the early cash flows are positive, (2) there is more than one change in the sign of the cash flows, or (3)
you need to choose between two mutually exclusive projects.

d. none all of them is in correct

3. Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: CF0
= -6,000, CF1 = +3,300, CF2 = +3,300.

a.Accept, since opportunity cost exceeds IRR.

b.Reject, since IRR exceeds opportunity cost.

c.Accept, since IRR exceeds opportunity cost.

d.Reject, since opportunity cost exceeds IRR.

4. If two projects offer the same, positive NPV, then:

a.they are mutually exclusive projects.

b.they have the same payback period.

c.they add the same amount to the value of the firm.

d.they also have the same IRR

5. The difference between the present value of an investment and its cost is the:

a.payback period.

b.net present value.

c.discounted payback period.

d.internal rate of return.

e.profitability index.

6. Net present value:

a.is not as widely used a tool as payback and discounted payback.

b.is very similar in its methodology to the average accounting return.

c.is easy to explain to non-financial managers and thus is the primary method of analysis used by the
lowest levels of management.

d.cannot be used when deciding between two mutually exclusive projects.

e.is more useful to decision makers than the internal rate of return when comparing different sized
projects.

7. If the IRR for a project is 15%, then the project's NPV would be:

a.positive at a discount rate of 15%.

b.negative at a discount rate of 10%.

c.positive at a discount rate of 20%.

d.negative at a discount rate of 20%.

8. How can the net present value rule be used to analyze three common problems that involve
competing projects?

a. Sometimes a project may have a positive NPV if undertaken today but an even higher NPV if the
investment is delayed. Choose between these alternatives by comparing their NPVs today.

b. When you have to choose between projects with different lives, you should put them on an equal
footing by comparing the equivalent annual annuity or benefit of the two projects.
c. When you are considering whether to replace an aging machine with a new one, you should compare
the annual cost of operating the old one with the equivalent annual annuity of the new one.

d. all of the above are correct.

9. Which one of the following statements is correct concerning the payback period?

a.An investment should be accepted any time the payback period is less than the discounted payback
period, given a positive discount rate

b.An investment should be rejected if the payback is positive and accepted if it is negative.

c.An investment is acceptable if its calculated payback period is less than some pre-specified period
of time.

d.An investment is acceptable if its calculated payback period is greater than some pre-specified period of
time.

e.An investment should be accepted if the payback is positive and rejected if it is negative.

10. Net present value is the present value of the cash flows subtracted from the initial investment.

a.False

b.True

11. What is the approximate IRR for a project that costs $100,000 and provides cash inflows of
$30,000 for 6 years?

a.30.0%

b.32.3%

c.80.0%

d.19.9%

12. The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:

a.profitability index.

b.internal rate of return.

c.net present value.

d.average accounting return.

e.profile period.

13. Which of the following best illustrates the problem imposed by capital rationing?

a.Bypassing projects that have positive IRRs

b.Bypassing projects that have positive NPVs

c.Accepting projects with the highest NPVs first

d.Accepting projects with the highest IRRs first

14. If a project has a cost of $50,000 and a profitability index of 0.4, then:

a.its NPV is $20,000.

b.its cash inflows are $70,000.

c.the present value of its cash inflows is $30,000.

d.its IRR is 20%.

15. What are the three problems that often involve competing projects?

a."When to postpone an investment expenditure?"

b. "How to choose between projects with equal lives?"

c. "When to replace equipment?"

d. "When to exit from an investment?

e.all of the above.

16. Which of the following statements is incorrect regarding the profitability index?

a. The profitability index can be used to choose between projects when funds are limited.

b. If there is a shortage of capital, companies need to choose projects that offer the highest net present
value per dollar of investment. This measure is known as the profitability index.

c.neither a nor b is incorrect.

17. An investment is acceptable if the profitability index (PI) of the investment is:
a.greater than the internal rate of return (IRR).

b.greater than a pre-specified rate of return.

c.less than the net present value (NPV).

d.less than one.

e.greater than one.

18. Which of the following statements is correct for a project with a positive NPV?

a.The profitability index equals one.

b.The discount rate exceeds the cost of capital.

c.IRR exceeds the cost of capital.

d.Accepting the project has an indeterminate effect on shareholders.

19. Which of the following changes will increase the NPV of a project?

a.A decrease in the number of cash inflows

b.An increase in the initial cost of the project

c.A decrease in the size of the cash inflows

d.A decrease in the discount rate

20. The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:

a.profile period.

b.profitability index.

c.net present value.

d.internal rate of return.

e.average accounting return.

21. Which of the following statements is incorrect regarding the payback period rule?

a. The payback rule always makes shareholders better off.

b. The net present value rule and the rate of return rule both properly reflect the time value of money. But
companies sometimes use rules of thumb to judge projects. One is the payback rule, which states that a
project is acceptable if you get your money back within a specified period.

c. The payback rule takes no account of any cash flows that arrive after the payback period and fails to
discount cash flows within the payback period.

d. a and b

22. The length of time required for a project's discounted cash flows to equal the initial cost of the
project is called the:

a.internal rate of return.

b.discounted profitability index.

c.payback period.

d.net present value.

e.discounted payback period.

23. The discounted payback rule states that you should accept an investment project if its discounted
payback period:

a.is positive and rejected if it is negative.

b.exceeds some pre-specified period of time.

c.exceeds the life of the investment

d.is less than the payback period.

e.is less than some pre-specified period of time.

24. What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if
the opportunity cost of capital is 14%?

a.$4,473.44

b.$35,000.00

c.$3,397.57

d.$16,100.00
 25. When managers cannot determine whether to invest now or wait until costs decrease later, the
rule should be to:

a.invest now to maximize the NPV.

b.invest at the date that gives the highest NPV today.

c.postpone until the opportunity cost reaches its lowest.

d.postpone until costs reach their lowest.

26. The length of time required for an investment to generate cash flows sufficient to recover the
initial cost of the investment is called the:

a.discounted cash period.

b.internal rate of return.

c.net present value.

d.profitability index.

e.payback period.

27. What is the maximum that should be invested in a project at time zero if the inflows are estimated
at $40,000 annually for three years, and the cost of capital is 9%?

a.$101,251.79

b.$109,200.00

c.$117,871.97

d.$130,800.0

28. A situation in which accepting one investment prevents the acceptance of another investment is
called the:

a.net present value profile

b.issues of scale problem

c.mutually exclusive investment decision

d.multiple choices of operations decisions.

e.operational ambiguity decision

29. If a project has a net present value equal to zero, then:

I. the present value of the cash inflows exceeds the initial cost of the project.

II. the project produces a rate of return that just equals the rate required to accept the project.

III. the project is expected to produce only the minimally required cash inflows.

IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present
value.

a.I, II, and IV only

b.II, III, and IV only

c.II and IV only

d.II and III only

e.I, II, and III only

30. The primary reason that company projects with positive net present values are considered
acceptable is that:

a.the required cash inflows exceed the actual cash inflows.

b.the investment's cost exceeds the present value of the cash inflows.

c.they create value for the owners of the firm.

d.the project's rate of return exceeds the rate of inflation.

e.they return the initial cash outlay within three years or less.

31. When managers cannot determine whether to invest now or wait until costs decrease later, the
rule should be to:

a.postpone until costs reach their lowest.

b.invest now to maximize the NPV.

c.invest at the date that gives the highest NPV today.

d.postpone until the opportunity cost reaches its lowest.

 32. Projects with an NPV of zero decrease shareholders' wealth by the cost of the project.

a.True

b.False

33. The decision rule for net present value is to:

a.accept all projects with positive net present values.

b.reject all projects with rates of return exceeding the opportunity cost of capital.

c.accept all projects with cash inflows exceeding initial cost.

d.reject all projects lasting longer than 10 years.

34. Which of the following investment criteria does not take the time value of money into
consideration?

a.Net present value

b.Profitability index

c.Book rate of return

d.Internal rate of return for borrowing projects

35. All else constant, the net present value of a project increases when:

a.the initial cost of a project increases.

b.the rate of return decreases.

c.all cash inflows occur during the last year of a project's life instead of periodically throughout the life of
the project

d.each cash inflow is delayed by one year.

e.the discount rate increases.

36. Payback is frequently used to analyze independent projects because:

a.it is the most desirable of all the available analytical methods from a financial perspective.

b.it is easy and quick to calculate.

c.it considers the time value of money.

d.it produces better decisions than those made using either NPV or IRR.

e.all relevant cash flows are included in the analysis.

STOCK VALUATION

1. Zeta Corporation can reinvest net income to earn 18% per year. What will be Zeta’s long-term
dividend growth rate if Zeta constantly pays out 25% of earnings as dividends?

a.13.5%

b.18%

c.4.5%

d.25%

2. The current price is $40 and the dividend paid is $10 then the dividend yield will be

a.0.04

b.4

c.25

d.0.25

3. Which of the following is another name for the required return on a stock?

a.Discount rate.

b.Value.

c.Retention ratio.

d.Dividend payout ratio.

4. The dividend growth model:

I. assumes that dividends increase at a constant rate forever

II. can be used to compute a stock price at any point in time

III. can be used to value zero-growth stocks

IV. requires the growth rate to be less than the required return
a.I and III only

b.II and IV only

c.I, II and IV only

d.I, III, and IV only

e.I, II, III and IV

5. Corporation B is a normal-growth company that expects to earn 13% on reinvested earnings. If the
company pays 30% of its earnings as dividends, what will be the stock’s dividend growth rate?

a.17.0%

b.39.0%

c.9.1%

d.3.9%

6. Galloway, Inc. has an odd dividend policy. The company has just paid a dividend of $7 per share
and has announced that it will increase the dividend by $2 per share for each of the next 5 years,
and then never pay another dividend. How much are you willing to pay per share today to buy this
stock if you require a 15% return?

a.$27.08

b.$42.60

c.$34.15

d.$43.33

e.$41.72

7. What is the model called that determines the present value of a stock based on its next annual
dividend, the dividend growth rate, and the applicable discount rate?

a.earnings capitalization

b.discounted dividend

c.capital pricing

d.dividend growth
e.zero growth

8. The paid dividend is $20 and the current price is $50 then the dividend yield will be

a.30

b.70

c.40

d.0.4

9. Bechtel Machinery stock currently sells for $50 per share. The market requires a 15% return on the
firm's stock. The company maintains a constant 8% growth rate in dividends. What was the most
recent annual dividend per share paid on this stock?

a.$3.67

b.$3.91

c.$3.50

d.$3.00

e.$3.24

10. Which one of the following is computed by dividing next year's annual dividend by the current
stock price?

a.dividend yield

b.Yield to maturity

c.capital gains yield

d.total yield

e.growth rate

Feedback

11. Langley Enterprises pays a constant dividend of $0.60 a share. The company announced today that
it will continue to pay the dividend for another 2 years after which time all dividends will cease.
What is one share of this stock worth today if the required rate of return is 16.5%?
a.$0.92

b.$1.04

c.$1.09

d.$1.20

e.$0.96

12. KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on
paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend
will be constant at $2 per share per year. What is the market price of this stock if the market rate of
return is 10.5%?

a.$15.98

b.$18.24

c.$21.16

d.$16.07

13. The value of stock as concluded with the help of analysis by particular is classified as

a.both intrinsic value and fundamental value

b.particular value

c.fundamental value

d.intrinsic value

14. Shares of Hot Donuts common stock are currently selling for $32.35. The last annual dividend paid
was $1.10 per share and the market rate of return is 10.7%. At what rate is the dividend growing?

a.12.60%

b.14.10%

c.7.06%

d.10.42%

e.8.67%
 15. Free Motion Enterprises paid a $2.20 per share annual dividend last week. Dividends are expected
to increase by 3.75% annually. What is one share of this stock worth to you today if your required
rate of return is 15%?

a.$19.30

b.$20.59

c.$19.56

d.$19.06

e.$20.29

16. Which of the following is equal to the present value of all cash proceeds received by a stock investor?

a.Discount rate.

b.Value.

c.Retention ratio.

d.Dividend payout ratio.

17. Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that
increases by 3% annually. The market rate of return on this stock is 8.20%. What is the amount of
the last dividend paid?

a.$1.92

b.$2.10

c.$1.80

d.$1.98

e.$1.86

18. Upper Crust Bakers just paid an annual dividend of $2.80 a share and is expected to increase that
amount by 4% per year. If you are planning to buy 1,000 shares of this stock next year, how much
should you expect to pay per share if the market rate of return for this type of security is 11.50% at
the time of your purchase?

a.$40.38
b.$38.16

c.$38.83

d.$42

e.$37.33

19. Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a
constant rate of 2.75% annually. The firm just paid an annual dividend of $1.67. What will the
dividend be six years from now?

a.$2.02

b.$1.97

c.$1.88

d.$1.92

20. Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but
management expects to reduce the payout by 9 % each year, indefinitely. How much are you willing
to pay today per share to buy this stock if you require a 15% rate of return?

a.$34.79

b.$37.92

c.$38.27

d.$42.09

e.$41.33

21. The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has
promised to maintain a constant dividend even though economic times are tough. How much are
you willing to pay for one share of this stock if you want to earn a 12% annual return?

a.$14.56

b.$15.23

c.$14.79

d.$13.75