1) You are
considering an investment opportunity that costs $234,000 and will
return 12% on your investment. There are higher returning investments
available in the financial markets that are comparable to this
investment opportunity in terms of risk. However, a bank offers to lend
you up to $234,000 at 9% with no conditions. Should you undertake this
investment opportunity?
a.
b.
2) You
are considering two insurance settlement offers. The first offer are
annual payments of $50,000 for 5 years with the first payment made at
the end of the first year. The other offer is the payment of one lump
sum amount today. You are trying to decide which offer to accept given
the fact that your discount rate is 12 percent. What is the minimum
amount that you will accept today if you are to select the lump sum
offer?
a. $195,618.19
b. $201,867, 47
c. $180.238.81
d. $197,548.43
e. $214,142.50 3)
Which of the following statements is (are) true?
(I)
Managers should not focus on current stock value because doing so will
lead to an overemphasis on short term earnings at the expense of long
term investments.
(II) Other stakeholders will generally agree
that the primary goal of the firm should be to maximize shareholders’
wealth because they have a prior claim over shareholders to the firm’s
cash flow and liquidation value.
(III) Corporations dominate the
economy in terms of their numbers (number of businesses organized as
corporations), their sales, and their profits.
(IV) We value
investment assets by valuing their cash flow streams. Cash flow streams
are unique in terms of the size of their cash receipts, their timing,
and their risk.
a.
b.
c.
d.
e.
f. (II) 4)
Three
alternative machine models are being considered for an ongoing
operation. The three alternatives will be used in the production of the
same product. Therefore, the selection among the three will be based on
total costs. Model A costs $105,000 and will last 4 years. Its real
operating cost is $10,200/year. Model B costs $110,000 and will last 5
years. Its real operating cost is $9,400/year. Model C costs $125,000
and will last 6 years, Its real operating cost is $9,600/year. It is
determined that the real opportunity cost of capital is 7%. Rank the
three models from the best choice to the least choice.
a. Best A, B, C Least
b. Best C, B, A Least
c. Best B, A, C Least
d. Best A, C, B, Least
e. Best C, A, B Least
f. Best B, C, A Least 5)
You
are considering an investment with the following cash flows. If the
required rate of return for this investment is 13.5%, should you accept
it based solely on the internal rate of return rule? Why or why not?
Year Cash Flow
0 -$14,000
1 $8,500
2 $96000
3 -$2,300
a.
b.
c.
d.
e.
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