Question 1 (1 point)
ARMA corporation donates a valuable painting from its private collection to an art
museum. Which of the following are incremental cash flows associated with the donation?
O I. The price of $20,000 that the firm paid for the painting
O II. The current market value of the painting, which is $50,000
O III. The reduction of $4,000 in taxes due to its declared tax deduction
O IV. The deduction of $30,000 from income that the firm declares for its charitable gift
MY Answer: II and III
Question 2 (1 point)
A company contemplates the construction of a new production facility. Which of the
following costs should be included in the initial investment?
O Two of the current employees’ $70,000 salary, unchanged by the project
O $400,000 cost of land owned for 5 years
O $25,000 payment to consultants hired for the project
O $50,000 market value of production equipment produced internally
MY Answer: $25,000 payment to consultants hired for the project & $50,000 market value
of production equipment
Question 3 (1 point)
Which of the following could be considered an example of managers putting their interests
over stockholders' interests?
O All of the above
O I, III, and IV
O I only
O I and IV only
MY Answer: I, III, and IV
Question 4 (1 point)
Which of the following would more likely make an acceptable project appear
unacceptable?
O Discounting real cash-flows with nominal rates
O Discounting nominal cash-flows with real rates
O Discounting real cash-flows with real rates
O Discounting nominal cash-flows with nominal rates
MY Answer: Discounting nominal cash-flows with real rates
Question 5 (1 point)
Determine the covariance with the market portfolio, given a beta of 0.9, company variance
of 0.8, and market variance of 0.6.
O 0.54
O 0.75
O 0.89
O 0.42
MY Answer: 0.54
Question 6 (1 point)
A precision lathe costs $15,000 upfront and $22,000 per year to operate. Discount rate is
10%, lifespan is 6 years. What is the equivalent annual cost?
O $23,765.34
O $27,815.74
O $25,444.11
O $22,637.98
MY Answer: $27,815.74
Question 7 (1 point)
If you insulate your office for $12,000, you’ll save $1,000/year forever. What is the NPV if
the cost of capital is 8%?
O $500
O $1,500
O -$2,500
O $2,500
MY Answer: $500
Question 8 (1 point)
What is the IRR of the insulation investment from Question 7?
O 13.75%
O 100/6
O 12
O 8.33%
MY Answer: 8.33%
Question 9 (1 point)
The benefits of portfolio diversification are LOWEST when investing in assets which are:
O perfectly positively correlated
O there are no benefits to diversification
O uncorrelated
O negatively correlated
MY Answer: perfectly positively correlated
Question 10 (1 point)
Which of the following statements is NOT true about the CAPM?
O I. CAPM relies on beta to measure market risk
O II. Expected returns should lie on the Security Market Line (SML)
O III. CAPM prices unique diversifiable risks
O IV. Total expected return is risk-free rate plus market risk premium
MY Answer: III only
Question 11 (1 point)
A firm’s financing mix is 55% equity, 45% debt. Cost of equity (CAPM): 12%. What is the
cost of equity?
O 120/6
O 13%
O 110/6
MY Answer: 12% (based on CAPM calculation provided earlier)
Question 12 (1 point)
What is the firm’s WACC?
O 7.89%
O 9.56%
O 8.56%
O 5.98%
MY Answer: 8.56%
