Net Present Value and Cash Flow

Topics: Net present value, Rate of return, Capital asset pricing model Pages: 10 (1412 words) Published: September 14, 2014
Corporate Financial Management
Practice Mid-Semester Examination
(Answers at back)
Disclaimer:
This practice exam covers a selection of the types of questions that may be asked in the mid-semester exam, however it should not be taken as being exhaustive as to the topics that could be included in the exam. Students should therefore not be surprised if other types of questions appear in the exam.

1.

$200 invested today and earning 8 per cent per annum compounded semi-annually will grow to what amount at the end of three years?
(A)
(B)

$251.94

(C)

$380.75

(D)
2.

$158.80

$253.06

Bill plans to fund his individual retirement account with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn an effective return of 12 per cent per annum on his contributions, how much will he have accumulated at the end of twenty years, rounded to the nearest dollar?

(A)
(B)

$19,292

(C)

$144,105

(D)
3.

$14,938

$40,000

A firm’s profit before tax is $150 000 and depreciation expense is $30,000. Assuming a company tax rate of 30%, the firm’s cash flow from operations is: (A)

$840,000

(B)

$180,000

(C)

$135,000

(D)

$75,000

4.

Given an effective annual interest rate of 14 per cent, the present value of a perpetuity consisting of yearly payments of $25,000 starting immediately is, rounded to the nearest dollar
(A)
(B)

$203,571

(C)

$178,571

(D)
5.

$232,071

$156,641

If the present value of a perpetual income stream is increasing, the discount rate must be
(A)
(B)

decreasing

(C)

increasing proportionally

(D)
6.

increasing

changing unpredictably

Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. To the nearest dollar, how much must Janice deposit annually in an account paying interest of 10 per cent per annum compounded annually in order to have enough money to send her parents on the cruise, assuming the first deposit is to be made one year from now?

(A)

$2,457

(B)

$3,000

(C)

$2,234

(D)

$1,862

7.

Marla borrows $4,500 and repays the loan with four equal quarterly installments, with the first installment made 3 months after the loan is made. If interest is charged at a rate of 12 per cent per annum compounded quarterly, the quarterly installment is

(A)
(B)

$1,075.62

(C)

$1,210.62

(D)
8.

$1,107.89

$1,246.94

All of the following are key inputs to the bond valuation process except for (A)
(B)

timing of cash flows

(C)

inflation

(D)
9.

future cash flows

a measure of risk

Perfectly __________ correlated returns move exactly together and have a correlation coefficient of __________, while perfectly __________ correlated returns move in exactly opposite directions and have a correlation coefficient of __________.

(A)

positively; +1; negatively; -1

(B)

negatively; +1; positively; -1

(C)

positively; -1; negatively; +1

(D)

negatively; -1; positively; +1

10.

The portion of an asset's risk that is attributable to firm-specific, random causes is called
(A)
(B)

unsystematic or non-systematic risk

(C)

economic risk

(D)
11.

systematic risk

non-diversifiable risk

The higher an asset's beta
(A)
(B)

the more responsive the asset’s return is to changing market returns.

(C)

the lower the expected return will be in an up market.

(D)
12.

the higher the expected return will be in a down market.

the less responsive the asset’s return is to changing market returns.

Asset P has a beta of 0.9. The risk-free rate of return is 8 per cent, while the expected return on the market portfolio of assets is 14 per cent. According to the capital asset pricing model, the asset's required rate of return is (A)

(B)

6 per cent

(C)

10 per cent

(D)
13....
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