1. Using the company cost of capital to evaluate a project is:
I) Always correct II) Always incorrect III) Correct for projects that are about as risky as the average of the firm's other assets
2. Which of the following type of projects has average risk?
3. The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company's cost of capital. (Assume no taxes.)
4. The hurdle rate for capital budgeting decisions is
5. The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)
6. On a graph with common stock returns on the Y- axis and market returns on the X-axis, the slope of the regression line represents the:
7. Generally, post audits are conducted for large projects
8. You are given the following data for year-1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%.
9. The following are drawbacks of sensitivity analysis except:
A. it provides ambiguous results. B. underlying variables are likely to be interrelated. C. it provides additional information about the project that is useful. D. all of the above statements are drawbacks of sensitivity analysis.
10. The accounting break-even point occurs when: A. the total revenue line cuts the fixed cost line B. the present value of inflows line cuts the present value of outflows line C. the total revenue line cuts the total cost line D. none of the above