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Section A: Answer Questions 1-20 on the Multiple Choice Answer Card. For each question, select the one best answer.
1. Which of the following statements concerning capital budgeting is NOT true?
A. It makes sense for smaller businesses to use payback period method as it deals with time value of money well.
B. NPV and IRR can lead to the different conclusion in choosing between mutually exclusive projects.
C. A project with zero NPV provides an average return that will just compensate for the risk taken.
D. The reinvestment rate typically assumed in NPV calculation is the cost of capital or the hurdle rate itself.
E. Among all capital budgeting tools, NPV is the most consistent with the Value Based Management (VBM) principle.
2. Which of the following scenarios is appropriate to use WACC as the discount rate in the NPV analysis?
A. Bruno is considering an introduction of the new (but similar) products of the company to the existing customers.
B. Ed is evaluating entering a new industry to diversify the company’s risk.
C. Sade is considering a speculative venture with a company’s Japanese supplier.
D. Angela is looking into the project that will improve cost management with known technology within the company.
E. Rebecca is evaluating whether buying a stock based on its current price will add to her wealth.
3. The book value and market value of equity for XYZ Company is $200,000,000 and $300,000,000 respectively. The company has 1,000,000 shares outstanding and the current share price is $300. The long-term debt of the company is recorded as $600,000,000 (book value and market value equal). The company’s net income is $20,000,000. What is the ROA of the company?
A. 5 %
B. 3.33%
C. 2.5%.
D. 1.5%
E. None of the above
4. What is the EAC of a project that has the present value of cost of $1 million through its 10 year life time? The discount rate involved is 7%.
A. $142,377.1
B. $153,769.3
C. $167,824.4
D. $175,093.5
E. None of the above
10. Which of the following statements is not true?
A. Assets with larger betas are more sensitive to idiosyncratic risk.
B. The market portfolio has a beta of one (Beta = 1).
C. The slope of the SML line is the market risk premium (Rm - Rf).
D. Beta of an asset can be negative.
E. In the context of SML, the expected return of a share with a beta of 0.96 will be lower than the expected return of the corresponding stock market.