6--7

The objective of a firm's management is to only undertake the projects that ________ the market value of shareholders' equity.

 

• decrease

• do not decrease

• change

• do not change

The decision rule that management uses with the net present value is to undertake only those projects with ________ NPV.

• a discounted

• a contingent

• a positive

• negative

Consider the following annual cash flows:

 

Year Cash Flows (in thousands of dollars)

0 –2,000

1 1,200

2 1,500

3 1,800

Using a cost of capital of 15%, compute this project's NPV.

• $5,361,000

• $3,548,000

• $3,361,000

• $1,361,000

Net cash inflows from operations can be computed in which of the following ways?

• Cash Flow = Revenue – Cash Expenses – Taxes

• Cash Flow = Net Income + Noncash Expenses

• Cash Flow = Revenue – Total Expenses – Taxes + Noncash Expenses

• all of the above

1. A negative sign in front of a cash-flow forecast for a particular year means that it is an ________.

• a) inflow

• b) outflow

• c) indeterminate flow

• d) more information is required to make this determination

In computing a project's cost of capital the risk to use is ________.

• a) the risk of the financing instruments used to fund the project

• b) the risk of the project's cash flows

• c) a risk-free rate

• d) a historical risk rate using T-bills

1. A capital budgeting project's cost of capital should reflect only the ________ risk of the project, not the project's ________ risk.

• a) unsystematic, systematic

• b) unsystematic, market-related

• c) systematic, unsystematic

• d) systematic, market-related

1. In regard to an asset, the ________ is defined as the process well-informed investors must pay for it in a free and competitive market.

• (a) analyst value

• (b) technical value

• (c) competitive value

• (d) fundamental value

1. The ________ states that in a competitive market, if two assets are equivalent, they will tend to have the same market price.

• (a) Law of Real Interest Rates

• (b) Law of One Price

• (c) Law of Price Equivalency

• (d) Law of Futures

1. The Law of One Price is enforced by a process called ________, the purchase and immediate sale of equivalent assets in order to earn a sure profit from a difference in their prices.

• (a) swapping

• (b) maximization

• (c) arbitrage

• (d) speculation