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Financial Management 2017 - Quiz and Case Study Guides - Corporate Finance, 4e (Berk / DeMarzo) - Quiz - Chapter 7

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 7   Investment Decision Rules

 

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 7   Investment Decision Rules

 

7.1   NPV and Stand-Alone Projects

 

1) Which of the following statements is FALSE?

  1. A) About 75% of firms surveyed used the NPV rule for making investment decisions.
  2. B) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
  3. C) To decide whether to invest using the NPV rule, we need to know the cost of capital.
  4. D) NPV is positive only for discount rates greater than the internal rate of return.

Answer:  D

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Conceptual

 

Use the following information to answer the question(s) below.

 

Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. 

 

2) Assume that once her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to:

  1. A) $3.75 million
  2. B) $12.20 million
  3. C) $13.00 million
  4. D) $13.75 million

Answer:  D

Explanation:  D)  NPV = $11 - $8/(1.10)1 + $5/(.10 - -0.40) = $ 13.72727

Diff: 3

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

 

3) Which of the following statements is FALSE?

  1. A) In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.
  2. B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.
  3. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
  4. D) If the cost of capital estimate is more than the IRR, the NPV will be positive.

Answer:  D

Explanation:  D) If the cost of capital estimate is more than the IRR, the NPV will be negative.

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Conceptual

Use the following information to answer the question(s) below.

 

You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%.

 

 

4) The NPV for this project is closest to:

  1. A) $29,200
  2. B) $39,500
  3. C) $129,200
  4. D) $139,500

Answer:  B

Explanation:  B)  NPV = -100,000 + 500,000/(1.020)7 = 39,540.82

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

5) The IRR for this project is closest to:

  1. A) 15.60%
  2. B) 18.95%
  3. C) 20.00%
  4. D) 25.85%

Answer:  D

Explanation:  D) IRR =  - 1 = .25849895

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

 

6) The decision you should take regarding this project is

  1. A) reject the project since the NPV is negative.
  2. B) reject the project since the NPV is positive.
  3. C) accept the project since the IRR < 20%.
  4. D) accept the project since the IRR > 20%.

Answer:  D

Explanation:  D) IRR =  - 1 = .25849895

NPV = -100,000 + 500,000/(1.020)7 = 39,540.82

Therefore, we should accept because NPV > 0 and because IRR > 20%.

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

Use the following information to answer the question(s) below.

 

Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. 

 

7) Assuming that Palin's cost of capital is 10%, then the NPV of her book deal is closest to:

  1. A) $2.00 million
  2. B) $2.20 million
  3. C) $3.00 million
  4. D) $3.75 million

Answer:  D

Explanation:  D)  NPV = $11 - $8/(1.10)1 = $ 3.72727

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

8) The IRR of Palin's book deal is closest to:

  1. A) -27.25%
  2. B) -37.50%
  3. C) 27.25%
  4. D) 37.50%

Answer:  A

Explanation:  A) IRR =  - 1 = -0.27272727

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical


Use the table for the question(s) below.

 

Consider a project with the following cash flows:

 

Year

Cash Flow

0

-10,000

1

4000

2

4000

3

4000

4

4000

 

9) If the appropriate discount rate for this project is 15%, then the NPV is closest to:

  1. A) $6000
  2. B) -$867
  3. C) $1420
  4. D) $867

Answer:  C

Explanation:  C) NPV = -10,000 + 4000/(1.15)1 + 4000/(1.15)2 + 4000/(1.15)3 + 4000/(1.15)4 = 1419.91

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

50

60

N/A

.15

B

-73

30

30

30

30

.15

 

10) The NPV of project A is closest to:

  1. A) 12.0
  2. B) 12.6
  3. C) 15.0
  4. D) 42.9

Answer:  A

Explanation:  A) NPV = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

11) The NPV of project B is closest to:

  1. A) 12.6
  2. B) 23.3
  3. C) 12.0
  4. D) 15.0

Answer:  A

Explanation:  A) NPV = -73+ 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.6494

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

Use the information for the question(s) below.

 

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000.  The Sisyphean Company expects cash inflows from this project as detailed below:

 

Year One

Year Two

Year Three

Year Four

$200,000

$225,000

$275,000

$200,000

 

The appropriate discount rate for this project is 16%.

 

12) The NPV for this project is closest to:

  1. A) $176,270
  2. B) $123,420
  3. C) $450,000
  4. D) $179,590

Answer:  A

Explanation:  A) NPV = -450,000+ 200,000/(1.16)1 + 225,000/(1.15)2 + 275,000/(1.15)3 + 200,000/(1.15)4 = 176,265

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

C/F

Year 1

C/F

Year 2

C/F

Year 3

C/F

Year 4

C/F

Year 5

C/F

Year 6

C/F

Year 7

C/F

Discount

Rate

Alpha

-79

20

25

30

35

40

N/A

N/A

15%

Beta

-80

25

25

25

25

25

25

25

16%

 

13) The NPV for project Alpha is closest to:

  1. A) $20.96
  2. B) $16.92
  3. C) $24.01
  4. D) $14.41

Answer:  B

Explanation:  B) NPV = -79 + 20/(1.15)1 + 25/(1.15)2 + 30/(1.15)3 + 35/(1.15)4 + 40/(1.15)5 = 16.92

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

14) The NPV for project Beta is closest to:

  1. A) $24.01
  2. B) $16.92
  3. C) $20.96
  4. D) $14.41

Answer:  C

Explanation:  C) NPV = -80 + 25/(1.16)1 + 25/(1.16)2 + 25/(1.16)3 + 25/(1.16)4 + 25/(1.16)5 + 50/(1.16)6 + 25/(1.16)7= 20.96

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 


Use the information for the question(s) below.

 

Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies.  If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years.  Assume Larry's personal cost of capital is 10% per year.

 

15) The NPV of Larry's three movie Larry Boy offer is closest to:

  1. A) 3.5 million
  2. B) -1.6 million
  3. C) 1.6 million
  4. D) -1.0 million

Answer:  C

Explanation:  C) NPV = 14 + -5/(1.10)1 + -5/(1.10)2 + -5/(1.10)3 = 1.57

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical


Use the information for the question(s) below.

 

Boulderado has come up with a new composite snowboard.  Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project.  Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.  Boulderado's discount rate is 10%.

 

16) The NPV for Boulderado's snowboard project is closest to:

  1. A) $228,900
  2. B) $46,900
  3. C) $51,600
  4. D) $23,800

Answer:  C

Explanation:  C) CF0 = -250,000

CF1 = -250,000

CF2 = -250,000

CF3 = -250,000

CF4 = +200,000

CF5 = +200,000

CF6 = +200,000

CF7 = +200,000

CF8 = +200,000

CF9 = +200,000

CF10 = +200,000

CF11 = +200,000

CF12 = +200,000

CF13 = +200,000

I = 10

Compute NPV = 51,588

Diff: 2

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Analytical

 

17) The NPV profile graphs:

  1. A) the project's NPV over a range of discount rates.
  2. B) the project's IRR over a range of discount rates.
  3. C) the project's cash flows over a range of NPVs.
  4. D) the project's IRR over a range of NPVs.

Answer:  A

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Definition

 

18) The NPV profile:

  1. A) shows the payback period—the point at which NPV is positive.
  2. B) shows the internal rate of return—the point at which NPV is zero.
  3. C) shows the NPV over a range of discount rates.
  4. D) B and C are correct.

Answer:  D

Diff: 1

Section:  7.1 NPV and Stand-Alone Projects

Skill:  Definition

 

7.2   The Internal Rate of Return Rule

 

Use the following information to answer the question(s) below.

 

Frank Dewey Esquire from the firm of Dewey, Cheatum, and Howe, has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to Taggart Transcontinental. In return for this upfront payment, Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months. Frank's normal billable rate is $250 per hour for legal services.

 

1) Assuming that Dewey's cost of capital is 12% EAR, then the NPV of his retainer offer is closest to:

  1. A) -$7500
  2. B) -$7400
  3. C) $6000
  4. D) $7400

Answer:  D

Explanation:  D) Step #1  Monthly Interest Rate  - 1 = .009488793

Step #2  Monthly Opportunity Cost = 8 × $250 = $2000

Step #3

NPV = $30,000 - 2000  -  = $7416.97

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

2) Assuming that Dewey's cost of capital is 12% EAR, then the IRR of his retainer offer is closest to:

  1. A) -39.3%
  2. B) -3.3%
  3. C) 20.0%
  4. D) 39.3%

Answer:  A

Explanation:  A) Step #1  Monthly Opportunity Cost = 8 × $250 = $2000

Step #2  PV = 30,000, N = 12, PMT = -2000, FV = 0,

              Compute I = -3.276502% × 12 = -39.3180%

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

3) Assuming that Dewey's cost of capital is 12% EAR, then the number of potential IRRs that exist for this problem is equal to:

  1. A) 0
  2. B) 1
  3. C) 2
  4. D) 12

Answer:  B

Explanation:  B) This problem begins with a positive cash flow that is followed by 12 negative (opportunity) cash flows, giving one change in the signs of the cash flows. This indicates that there will be one IRR for this problem.

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

Use the following information to answer the question(s) below.

 

Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.

 

4) The number of potential IRRs that exist for Rearden's mining operation is equal to:

  1. A) 0
  2. B) 1
  3. C) 2
  4. D) 12

Answer:  C

Explanation:  C) This problem begins with a negative cash flow that is followed by 11 positive cash flows and finally by one last negative cash flow, giving two changes in the signs of the cash flows. This indicates that there will be two IRRs for this problem.

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

5) One of the IRRs for Rearden's mining operation is closest to:

  1. A) 0%
  2. B) 10.6%
  3. C) 12.4%
  4. D) 72.0%

Answer:  B

Explanation:  B)  CF0 = -100, CFj = 16, Nj = 11, CFj = -4, Nj = 1, Compute IRR = 10.58%.

The TI Calculator does not alert to the second IRR, while the HP Calculator gives an error because of multiple IRRs.

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

6) Which of the following statements is FALSE?

  1. A) The IRR investment rule will identify the correct decision in many, but not all, situations.
  2. B) By setting the NPV equal to zero and solving for r, we find the IRR.
  3. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.
  4. D) The simplest investment rule is the NPV investment rule.

Answer:  D

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Conceptual

 

7) Which of the following statements is FALSE?

  1. A) The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.
  2. B) The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital.
  3. C) Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions.
  4. D) There are situations in which multiple IRRs exist.

Answer:  C

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Conceptual


Use the table for the question(s) below.

 

Consider a project with the following cash flows:

 

Year

Cash Flow

0

-10,000

1

4000

2

4000

3

4000

4

4000

 

8) Assume the appropriate discount rate for this project is 15%.  The IRR for this project is closest to:

  1. A) 21%
  2. B) 22%
  3. C) 15%
  4. D) 60%

Answer:  B

Explanation:  B) CF0 = -10,000

CF1 = 4000

CF2 = 4000

CF3 = 4000

CF4 = 4000

Compute IRR = 21.86%

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

50

60

N/A

.15

B

-73

30

30

30

30

.15

 

9) The internal rate of return (IRR) for project A is closest to:

  1. A) 7.7%
  2. B) 21.6%
  3. C) 23.3%
  4. D) 42.9%

Answer:  B

Explanation:  B) CF0 = -100

CF1 = 40

CF2 = 50

CF3 = 60

Compute IRR = 21.64%

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

10) The internal rate of return (IRR) for project B is closest to:

  1. A) 21.6%
  2. B) 23.3%
  3. C) 42.9%
  4. D) 7.7%

Answer:  B

Explanation:  B) CF0 = -73

CF1 = 30

CF2 = 30

CF3 = 30

CF4 = 30

Compute IRR = 23.34%

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

11) Which of the following statements is correct?

  1. A) You should accept project A since its IRR > 15%.
  2. B) You should reject project B since its NPV > 0.
  3. C) Your should accept project A since its NPV < 0.
  4. D) You should accept project B since its IRR < 15%.

Answer:  A

Explanation:  A) NPVA = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04

NPVB = -73+ 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.65

 

IRR A

CF0 = -100

CF1 = 40

CF2 = 50

CF3 = 60

Compute IRR = 21.64%

 

IRR B

CF0 = -73

CF1 = 30

CF2 = 30

CF3 = 30

CF4 = 30

Compute IRR = 23.34%

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

12) The maximum number of IRRs that could exist for project B is:

  1. A) 3
  2. B) 1
  3. C) 2
  4. D) 0

Answer:  B

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Conceptual


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

C/F

Year 1

C/F

Year 2

C/F

Year 3

C/F

Year 4

C/F

Year 5

C/F

Year 6

C/F

Year 7

C/F

Discount

Rate

Alpha

-79

20

25

30

35

40

N/A

N/A

15%

Beta

-80

25

25

25

25

25

25

25

16%

 

13) The internal rate of return (IRR) for project Alpha is closest to:

  1. A) 25.0%
  2. B) 22.2%
  3. C) 24.5%
  4. D) 22.7%

Answer:  D

Explanation:  D) CF0 = -79

CF1 = 20

CF2 = 25

CF3 = 30

CF4 = 35

CF5 = 40

Compute IRR = 22.68

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

14) The internal rate of return (IRR) for project Beta is closest to:

  1. A) 25.0%
  2. B) 22.7%
  3. C) 24.5%
  4. D) 22.2%

Answer:  C

Explanation:  C) PV = -80

PMT = 25

FV = 0

N = 7

Compute I = 24.52

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

15) Which of the following statements is correct?

  1. A) You should invest in project Beta since NPVBeta> 0.
  2. B) You should invest in project Alpha since IRRAlpha> IRR
  3. C) Your should invest in project Alpha since NPVAlpha< 0.
  4. D) You should invest in project Beta since IRRBeta> 0.

Answer:  A

Explanation:  A) NPV Alpha

NPV = -79 + 20/(1.15)1 + 25/(1.15)2 + 30/(1.15)3 + 35/(1.15)4 + 40/(1.15)5 = 16.92

 

NPV Beta

NPV = -80 + 25/(1.16)1 + 25/(1.16)2 + 25/(1.16)3 + 25/(1.16)4 + 25/(1.16)5 + 25/(1.16)6 + 25/(1.16)7= 20.96

 

IRR Alpha

CF0 = -79

CF1 = 20

CF2 = 25

CF3 = 30

CF4 = 35

CF5 = 40

Compute IRR = 22.68

 

IRR Beta

PV = -80

PMT = 25

FV = 0

N = 7

Compute I = 24.52

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical


Use the information for the question(s) below.

 

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000.  The Sisyphean Company expects cash inflows from this project as detailed below:

 

Year One

Year Two

Year Three

Year Four

$200,000

$225,000

$275,000

$200,000

 

The appropriate discount rate for this project is 16%.

 

16) The IRR for this project is closest to:

  1. A) 18.9%
  2. B) 22.7%
  3. C) 34.1%
  4. D) 39.1%

Answer:  C

Explanation:  C) CF0 = -450,000

CF1 = 200,000

CF2 = 225,000

CF3 = 275,000

CF4 = 200,000

Compute IRR = 34.12%

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 


Use the information for the question(s) below.

 

Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies.  If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years.  Assume Larry's personal cost of capital is 10% per year.

 

17) The IRR for Larry's three movie deal offer is closest to:

  1. A) 3.5%
  2. B) 1.6%
  3. C) -3.5%
  4. D) -1.6%

Answer:  A

Explanation:  A) CF0 = +14

CF1 = -5

CF2 = -5

CF3 = -5

Compute IRR = 3.53%

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

18) Larry should:

  1. A) reject the offer because the NPV < 0.
  2. B) accept the offer even though the IRR < 10%, because the NPV > 0.
  3. C) reject the offer because the IRR < 10%.
  4. D) accept the offer because the IRR > 0%.

Answer:  B

Explanation:  B) NPV = 14 + -5/(1.10)1 + -5/(1.10)2 + -5/(1.10)3 = 1.57

CF0 = +14

CF1 = -5

CF2 = -5

CF3 = -5

Compute IRR = 3.53%

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 


Use the information for the question(s) below.

 

Boulderado has come up with a new composite snowboard.  Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project.  Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.  Boulderado's discount rate is 10%.

 

19) The IRR for Boulderado's snowboard project is closest to:

  1. A) 10.4%
  2. B) 10.0%
  3. C) 11.0%
  4. D) 15.1%

Answer:  C

Explanation:  C) CF0 = -250,000

CF1 = -250,000

CF2 = -250,000

CF3 = -250,000

CF4 = +200,000

CF5 = +200,000

CF6 = +200,000

CF7 = +200,000

CF8 = +200,000

CF9 = +200,000

CF10 = +200,000

CF11 = +200,000

CF12 = +200,000

CF13 = +200,000

Compute IRR = 11.01%

Diff: 2

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

20) Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.  The maximum deviation allowable is closest to:

  1. A) 11.0%
  2. B) 0.0%
  3. C) 2.5%
  4. D) 1.0%

Answer:  D

Explanation:  D) CF0 = -250,000

CF1 = -250,000

CF2 = -250,000

CF3 = -250,000

CF4 = +200,000

CF5 = +200,000

CF6 = +200,000

CF7 = +200,000

CF8 = +200,000

CF9 = +200,000

CF10 = +200,000

CF11 = +200,000

CF12 = +200,000

CF13 = +200,000

Compute IRR = 11.01%

 

Maximum deviation = IRR - Cost of Capital = 11.0% - 10.0% = 1.0%

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Analytical

 

21) When using the internal rate of return (IRR) investment rule, we compare:

  1. A) the average return on the investment opportunity to returns on all other investment opportunities in the market.
  2. B) the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity.
  3. C) the NPV of the investment opportunity to the average return on the investment opportunity.
  4. D) the average return on the investment opportunity to the risk-free rate of return.

Answer:  B

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Definition

 

22) The internal rate of return rule can result in the wrong decision if the projects being compared have:

  1. A) differences in scale.
  2. B) differences in timing.
  3. C) differences in NPV.
  4. D) A and B are correct.

Answer:  D

Diff: 1

Section:  7.2 The Internal Rate of Return Rule

Skill:  Definition

 

Use the information for the question(s) below.

 

Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies.  If Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years.  Assume Larry's personal cost of capital is 10% per year.

 

23) Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.

Answer:  The NPV rule will always give the right decision.  In this problem, Larry starts with the cash up front, a positive cash flow, which is then followed by three negative cash flows.  This is the exact opposite as what we want with the IRR.  The IRR assumes that we start with a negative outflow followed by Inflow(s).  Since we start with a positive cash inflow, the IRR rule cannot be trusted to give the correct answer.

Diff: 3

Section:  7.2 The Internal Rate of Return Rule

Skill:  Conceptual

 

 

7.3   The Payback Rule

 

Use the following information to answer the question(s) below.

 

Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.

 

1) The payback period for Rearden's mining operation is closest to:

  1. A) 5.00 years
  2. B) 6.00 years
  3. C) 6.25 years
  4. D) 6.50 years

Answer:  C

Explanation:  C) Payback = 100/16 = 6.25 years

Diff: 1

Section:  7.3 The Payback Rule

Skill:  Analytical

2) Which of the following statements is FALSE?

  1. A) It is possible that an IRR does not exist for an investment opportunity.
  2. B) If the payback period is less than a pre-specified length of time, you accept the project.
  3. C) The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity, you should undertake the investment opportunity.
  4. D) It is possible that there is no discount rate that will set the NPV equal to zero.

Answer:  C

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Conceptual

 

3) Which of the following statements is FALSE?

  1. A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea.
  2. B) An IRR will always exist for an investment opportunity.
  3. C) A NPV will always exist for an investment opportunity.
  4. D) In general, there can be as many IRRs as the number of times the project's cash flows change sign over time.

Answer:  B

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Conceptual

 

 

4) Which of the following statements is FALSE?

  1. A) In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows.
  2. B) There is no easy fix for the IRR rule when there are multiple IRRs.
  3. C) The payback rule is primarily used because of its simplicity.
  4. D) No investment rule that ignores the set of alternative investment alternatives can be optimal.

Answer:  A

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Conceptual

 

5) Which of the following statements is FALSE?

  1. A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV.
  2. B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital.
  3. C) For most investment opportunities, expenses occur initially and cash is received later.
  4. D) Fifty percent of firms surveyed reported using the payback rule for making decisions.

Answer:  B

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Conceptual

Use the table for the question(s) below.

 

Consider a project with the following cash flows:

 

Year

Cash Flow

0

-10,000

1

4000

2

4000

3

4000

4

4000

 

6) Assume the appropriate discount rate for this project is 15%.  The payback period for this project is closest to:

  1. A) 3.0
  2. B) 2.5
  3. C) 2.0
  4. D) 4.0

Answer:  B

Explanation:  B) Payback = 10,000/4000 = 2.5

Diff: 1

Section:  7.3 The Payback Rule

Skill:  Analytical

 


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

50

60

N/A

.15

B

-73

30

30

30

30

.15

 

7) The payback period for project A is closest to:

  1. A) 2.0 years
  2. B) 2.4 years
  3. C) 2.5 years
  4. D) 2.2 years

Answer:  D

Explanation:  D) It is clear that the project is not paid off after two years since we have only received $90 toward the $100 investment.  To calculate the fraction of the third year, we take the $10 yet to be repaid ($100 investment - $40 (year 1) - $50 (year 2))/$60 (cashflow in year 3) = .166667 so the payback is 2.166667 years.

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Analytical

8) The payback period for project B is closest to:

  1. A) 2.5 years
  2. B) 2.0 years
  3. C) 2.2 years
  4. D) 2.4 years

Answer:  D

Explanation:  D) Payback = 73/30 = 2.43 years

Diff: 1

Section:  7.3 The Payback Rule

Skill:  Analytical

 


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

C/F

Year 1

C/F

Year 2

C/F

Year 3

C/F

Year 4

C/F

Year 5

C/F

Year 6

C/F

Year 7

C/F

Discount

Rate

Alpha

-79

20

25

30

35

40

N/A

N/A

15%

Beta

-80

25

25

25

25

25

25

25

16%

 

9) The payback period for project Alpha is closest to:

  1. A) 3.2 years
  2. B) 2.9 years
  3. C) 3.1 years
  4. D) 2.6 years

Answer:  C

Explanation:  C) It is clear that the project will not be paid off until sometime after year 3.  After the cashflow in year three there will still be $4 remaining to be paid back in year four:

(79 - 20 - 25 - 30) = 4

 

To find the fractional year take 4/35 = .1143 so payback is 3.11 years.

Diff: 2

Section:  7.3 The Payback Rule

Skill:  Analytical

 

10) The payback period for project Beta is closest to:

  1. A) 2.9 years
  2. B) 3.1 years
  3. C) 2.6 years
  4. D) 3.2 years

Answer:  D

Explanation:  D) Payback = 80/25 = 3.2

Diff: 1

Section:  7.3 The Payback Rule

Skill:  Analytical


Use the information for the question(s) below.

 

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000.  The Sisyphean Company expects cash inflows from this project as detailed below:

 

Year One

Year Two

Year Three

Year Four

$200,000

$225,000

$275,000

$200,000

 

The appropriate discount rate for this project is 16%.

 

11) The payback period for this project is closest to:

  1. A) 2.1 years
  2. B) 3.0 years
  3. C) 2.0 years
  4. D) 2.2 years

Answer:  A

Explanation:  A) It is clear that the project will not be paid off after 2 years.  The balance due after the second year is equal to 450,000 - 200,000 - 225,000 = $25,000.  To find the fractional year we take 25,000/275,000 = .0909 so the payback period = 2.09 years.

Diff: 1

Section:  7.3 The Payback Rule

Skill:  Analytical

 

 

7.4   Choosing Between Projects

 

1) Which of the following statements is FALSE?

  1. A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns.
  2. B) The IRR is affected by the scale of the investment opportunity.
  3. C) Multiple incremental IRRs might exist.
  4. D) The incremental IRR rule assumes that the riskiness of the two projects is the same.

Answer:  B

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

 

2) Which of the following statements is FALSE?

  1. A) The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives.
  2. B) When a manager must choose among mutually exclusive investments, the NPV rule provides a straightforward answer.
  3. C) The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule.
  4. D) Problems can arise using the IRR method when the mutually exclusive investments have differences in scale.

Answer:  C

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

3) Which of the following statements is FALSE?

  1. A) When using the incremental IRR rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative.
  2. B) Picking one project over another simply because it has a larger IRR can lead to mistakes.
  3. C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale.
  4. D) When the risks of two projects are different, only the NPV rule will give a reliable answer.

Answer:  A

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

 

 

4) Which of the following statements is FALSE?

  1. A) The incremental IRR need not exist.
  2. B) If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR.
  3. C) Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly.
  4. D) When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs.

Answer:  B

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

 

5) Consider two mutually exclusive projects A & B.  If you subtract the cash flows of opportunity B from the cash flows of opportunity A, then you should:

  1. A) take opportunity A if the regular IRR exceeds the cost of capital.
  2. B) take opportunity A if the incremental IRR exceeds the cost of capital.
  3. C) take opportunity B if the regular IRR exceeds the cost of capital.
  4. D) take opportunity B if the incremental IRR exceeds the cost of capital.

Answer:  B

Diff: 1

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

 

6) You are trying to decide between three mutually exclusive investment opportunities.  The most appropriate tool for identifying the correct decision is:

  1. A) NPV.
  2. B) profitability index.
  3. C) IRR.
  4. D) incremental IRR.

Answer:  A

Diff: 1

Section:  7.4 Choosing Between Projects

Skill:  Conceptual


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

50

60

N/A

.15

B

-73

30

30

30

30

.15

 

7) Assume that projects A and B are mutually exclusive.  The correct investment decision and the best rational for that decision is to:

  1. A) invest in project A since NPVB< NPV
  2. B) invest in project B since IRRB> IRRA.
  3. C) invest in project B since NPVB> NPV
  4. D) invest in project A since NPVA> 0.

Answer:  C

Explanation:  C) NPVA = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04

NPVB = -73 + 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.64

 

IRR A

CF0 = -100

CF1 = 40

CF2 = 50

CF3 = 60

Compute IRR = 21.65%

 

IRR B

CF0 = -73

CF1 = 30

CF2 = 30

CF3 = 30

CF4 = 30

Compute IRR = 23.34%

Diff: 3

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

8) An incremental IRR of Project B over Project A is closest to:

  1. A) 12.6%
  2. B) 23.3%
  3. C) 1.7%
  4. D) 17.3%

Answer:  A

Explanation:  A) First we need to find the incremental cash flows by taking cashflows of A - cashflows of B.

 

IRR A - B

 

CF0 = (-100 -  -73) = -27

CF1 = (40 - 30) = 10

CF2 = (50 - 30) = 20

CF3 = (60 - 30) = 30

CF4 = (0 - 30) = -30

Compute IRR = 12.63%

Diff: 3

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

9) The maximum number of incremental IRRs that could exist for project B over project A is:

  1. A) 1
  2. B) 2
  3. C) 0
  4. D) 3

Answer:  B

Diff: 3

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

 


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

C/F

Year 1

C/F

Year 2

C/F

Year 3

C/F

Year 4

C/F

Year 5

C/F

Year 6

C/F

Year 7

C/F

Discount

Rate

Alpha

-79

20

25

30

35

40

N/A

N/A

15%

Beta

-80

25

25

25

25

25

25

25

16%

 

10) Assume that projects Alpha and Beta are mutually exclusive.  The correct investment decision and the best rational for that decision is to:

  1. A) invest in project Beta since NPVBeta> 0.
  2. B) invest in project Alpha since NPVBeta< NPV
  3. C) invest in project Beta since IRRB> IRR
  4. D) invest in project Beta since NPVBeta> NPVAlpha > 0.

Answer:  D

Explanation:  D) NPV Alpha

NPV = -79 + 20/(1.15)1 + 25/(1.15)2 + 30/(1.15)3 + 35/(1.15)4 + 40/(1.15)5 = 16.92

 

NPV Beta

NPV = -80 + 25/(1.16)1 + 25/(1.16)2 + 25/(1.16)3 + 25/(1.16)4 + 25/(1.16)5 +

50/(1.16)6 + 25/(1.16)7 = 20.96

 

IRR Alpha

CF0 = -79

CF1 = 20

CF2 = 25

CF3 = 30

CF4 = 35

CF5 = 40

Compute IRR = 22.68

 

IRR Beta

PV = -80

PMT = 25

FV = 0

N = 7

Compute I = 24.52

Diff: 3

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

 

11) Assume that projects Alpha and Beta are mutually exclusive.  Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

  1. A) The incremental IRR should not be used since the projects have different lives.
  2. B) The incremental IRR should not be used since the projects have different discount rates.
  3. C) The incremental IRR should not be used since the projects have different cash flow patterns.
  4. D) Both the NPV and incremental IRR approaches are appropriate to solve this problem.

Answer:  B

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Conceptual

12) When choosing between projects, an alternative to comparing their IRRs is:

  1. A) to compute the incremental IRR, which tells us the discount rate at which it becomes profitable to switch from one project to the other.
  2. B) to compute the incremental payback period, which tells us the number of years during which it becomes profitable to switch from one project to the other.
  3. C) to compute the incremental NPV, which tells us the discount rate at which it becomes profitable to switch from one project to the other.
  4. D) There is no alternative selection criterion to comparing IRRs.

Answer:  A

Diff: 1

Section:  7.4 Choosing Between Projects

Skill:  Definition

 


Use the table for the question(s) below.

 

Consider two mutually exclusive projects with the following cash flows:

 

Project

C/F0

C/F1

C/F2

C/F3

C/F4

C/F5

C/F6

A

$(41,215)

$12,500

$14,000

$16,500

$18,000

$20,000

N/A

B

$(46,775)

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

 

13) You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.  How many potential incremental IRRs could there be?

  1. A) 3
  2. B) 0
  3. C) 2
  4. D) 1

Answer:  A

Explanation:  A)

Project

C/F0

C/F1

C/F2

C/F3

C/F4

C/F5

C/F6

A

($41,215)

$12,500

$14,000

$16,500

$18,000

20,000

0

B

($46,775)

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

 

 

 

 

 

 

 

 

B - A

($5560)

$2500

$1000

($1500)

($3000)

($5000)

$15,000

 

Note that there are three sign changes hence there are three potential IRRs.

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Analytical

14) If the discount rate for project A is 16%, then what is the NPV for project A?

Answer:  NPV A

CF0 = -41,215

CF1 = 12,500

CF2 = 14,000

CF3 = 16,500

CF4 = 18,000

CF5 = 20,000

I = 16

Compute NPV = $9999.50

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

 

15) If the discount rate for project B is 15%, then what is the NPV for project B?

Answer:  NPV B

CF0 = -46,775

CF1 = 15,000

CF2 = 15,000

CF3 = 15,000

CF4 = 15,000

CF5 = 15,000

CF6 = 15,000

Compute NPV = $9992.24

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

16) What is one of the incremental IRRs for project B over project A?  Would you feel comfortable basing your decision on the incremental IRR?

Answer: 

Project

C/F0

C/F1

C/F2

C/F3

C/F4

C/F5

C/F6

A

($41,215)

$12,500

$14,000

$16,500

$18,000

20,000

0

B

($46,775)

$15,000

$15,000

$15,000

$15,000

$15,000

$15,000

 

 

 

 

 

 

 

 

B - A

($5560)

$2500

$1000

($1500)

($3000)

($5000)

$15,000

 

Compute IRR = 8.95%, no since there are multiple sign changes in the incremental cash flows.

Diff: 2

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

17) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are mutually exclusive projects, which project would you take and why?

Answer:  NPV A

CF0 = -41,215

CF1 = 12,500

CF2 = 14,000

CF3 = 16,500

CF4 = 18,000

CF5 = 20,000

I = 16

Compute NPV = $9,999.50

 

NPV B

CF0 = -46,775

CF1 = 15,000

CF2 = 15,000

CF3 = 15,000

CF4 = 15,000

CF5 = 15,000

CF6 = 15,000

Compute NPV = $9,992.24

 

Take A, since NPV of A > NPV of B and NPV of A is positive.

Diff: 3

Section:  7.4 Choosing Between Projects

Skill:  Analytical

 

 

7.5   Project Selection with Resource Restraints

 

1) Which of the following statements is FALSE?

  1. A) If there is a fixed supply of a resource available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed.
  2. B) Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources.
  3. C) If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision.
  4. D) The profitability index is calculated as the NPV divided by the resources consumed by the project.

Answer:  A

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Conceptual

2) Which of the following statements is FALSE?

  1. A) The profitability index measures the value created in terms of NPV per unit of resource consumed.
  2. B) The profitability index is the ratio of value created to resources consumed.
  3. C) The profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist.
  4. D) The profitability index measures the "bang for your buck."

Answer:  C

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Conceptual

 

3) You are opening up a brand new retail strip mall.  You presently have more potential retail outlets wanting to locate in your mall than you have space available.  What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

  1. A) IRR
  2. B) Payback period
  3. C) NPV
  4. D) Profitability index

Answer:  D

Diff: 1

Section:  7.5 Project Selection with Resource Constraints

Skill:  Conceptual

 


Use the table for the question(s) below.

 

Consider a project with the following cash flows:

 

Year

Cash Flow

0

-10,000

1

4000

2

4000

3

4000

4

4000

 

4) Assume the appropriate discount rate for this project is 15%.  The profitability index for this project is closest to:

  1. A) .14
  2. B) .22
  3. C) .60
  4. D) .15

Answer:  A

Explanation:  A) NPV = -10,000 +  +  +  +  = $1420

PI = NPV/investment = 1420/10,000 = .1420

Diff: 1

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical


Use the table for the question(s) below.

 

Consider the following two projects:

 

 

Project

Year 0

Cash Flow

Year 1

Cash Flow

Year 2

Cash Flow

Year 3

Cash Flow

Year 4

Cash Flow

Discount Rate

A

-100

40

50

60

N/A

.15

B

-73

30

30

30

30

.15

 

5) The profitability index for project A is closest to:

  1. A) 0.12
  2. B) 21.65
  3. C) 0.17
  4. D) 12.04

Answer:  A

Explanation:  A) PI = NPV/Investment (or resources consumed)

 

NPV = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04

 

So, PI = 12.04/100 = .1204

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

6) The profitability index for project B is closest to:

  1. A) 23.34
  2. B) 12.64
  3. C) 0.17
  4. D) 0.12

Answer:  C

Explanation:  C) PI = NPV/Investment (or resources consumed)

 

NPV = -73 + 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.64

 

So, PI = 12.64/73 = .1732

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical


Use the table for the question(s) below.

 

Consider the following list of projects:

 

Project

Investment

NPV

A

135,000

6000

B

200,000

30,000

C

125,000

20,000

D

150,000

2000

E

175,000

10,000

F

75,000

10,000

G

80,000

9000

H

200,000

20,000

I

50,000

4000

 

7) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?

  1. A) Profitability Index
  2. B) Incremental IRR
  3. C) NPV
  4. D) IRR

Answer:  A

Diff: 1

Section:  7.5 Project Selection with Resource Constraints

Skill:  Conceptual

 

 

8) Assuming that your capital is constrained, which project should you invest in first?

  1. A) Project C
  2. B) Project G
  3. C) Project B
  4. D) Project F

Answer:  A

Explanation:  A)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

9) Assuming that your capital is constrained, what is the fifth project that you should invest in?

  1. A) Project H
  2. B) Project I
  3. C) Project B
  4. D) Project A

Answer:  A

Explanation:  A)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

 

10) Assuming that your capital is constrained, which project should you invest in last?

  1. A) Project A
  2. B) Project I
  3. C) Project D
  4. D) Project C

Answer:  C

Explanation:  C)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

Diff: 2

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

11) Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which projects should you invest in and in what order?

  1. A) CBFH
  2. B) CBGF
  3. C) BCFG
  4. D) CBFG

Answer:  A

Explanation:  A)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

 

This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000 on the table uninvested.  By replacing G with H the full $600,000 is invested and the NPV of the combination of projects is increased by $11,000.  Therefore, you should invest in projects CBFH.

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

12) Assume that your capital is constrained, so that you only have $600,000 available to invest in projects.  If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to:

  1. A) $65,000
  2. B) $80,000
  3. C) $69,000
  4. D) $111,000

Answer:  B

Explanation:  B)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

 

This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000 on the table uninvested. By replacing G with H the full $600,000 is invested and the NPV of the combination of projects is increased by $11,000. Therefore, you should invest in projects CBFH.

The NPV = NPVC + NPVB + NPVF + NPVH = 20,000 + 30,000 + 10,000 + 20,000 = $80,000.

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

13) Assume that your capital is constrained, so that you only have $500,000 available to invest in projects.  If you invest in the optimal combination of projects given your capital constraint, then the total NPV for all the projects you invest in will be closest to:

  1. A) $111,000
  2. B) $69,000
  3. C) $80,000
  4. D) $58,000

Answer:  B

Explanation:  B)

 

Project

 

Investment

 

NPV

Profitability Index

 

Rank

A

135,000

6000

0.0444

8

B

200,000

30,000

0.1500

2

C

125,000

20,000

0.1600

1

D

150,000

2000

0.0133

9

E

175,000

10,000

0.0571

7

F

75,000

10,000

0.1333

3

G

80,000

9000

0.1125

4

H

200,000

20,000

0.1000

5

I

50,000

4000

0.8000

6

 

The optimal combination based upon PI rankings is CBFG, so the total NPV = 20,000 + 30,000 + 10,000 + 9000 = $69,000

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical


Use the information for the question(s) below.

 

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000.  The Sisyphean Company expects cash inflows from this project as detailed below:

 

Year One

Year Two

Year Three

Year Four

$200,000

$225,000

$275,000

$200,000

 

The appropriate discount rate for this project is 16%.

 

14) The profitability index for this project is closest to:

  1. A) .44
  2. B) .26
  3. C) 0.39
  4. D) .34

Answer:  C

Explanation:  C) PI = NPV/Investment

 

NPV = -450,000 + 200,000/(1.16)1 + 225,000/(1.16)2 + 275,000/(1.16)3 + 2,000,000/(1.16)4 = 176,265

 

So, PI = 176,265/450,000 = 0.39

Diff: 1

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 


Use the information for the question(s) below.

 

Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it.  Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month.  The cash flows from each of the businesses has approximately the same amount of risk.  The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:

 

Business Name

Square Feet Required

Expected Monthly Cash Flow

Videos Now

4000

70,000

Gords Gym

3500

52,500

Pizza Warehouse

2500

52,500

Super Clips

1500

25,500

30 1/2 Flavors

1500

28,500

S-Mart 

12,000

           180,000

WalVerde Drugs

6000

147,000

Multigular Wireless

1000

22,250

 

 

15) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why?

Answer: 

Business Name

Square Feet Required

Expected Monthly Cash Flow

C/F per S.F.

Project Rank

Videos Now

4000

70,000

17.5

5

Gords Gym

3500

52,500

15

7

Pizza Warehouse

2500

52,500

21

3

Super Clips

1500

25,500

17

6

30 1/2 Flavors

1500

28,500

19

4

S-Mart

12,000

180,000

15

8

WalVerde Drugs

6000

147,000

24.5

1

Multigular Wireless

1000

22,250

22.25

2

 

So we select projects based upon their ranking until we run out of space.  The optimal combination is shown below:

 

WalVerde Drugs

6000

147,000

24.5

1

Multigular Wireless

1000

22,250

22.25

2

Pizza Warehouse

2500

52,500

21

3

30 1/2 Flavors

1500

28,500

19

4

Videos Now

4000

70,000

17.5

5

Total

15,000

$320,250

 

 

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

 

16) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?

Answer: 

Business Name

Square Feet Required

Expected Monthly Cash Flow

C/F per S.F.

Project Rank

Videos Now

4000

70,000

17.5

5

Gords Gym

3500

52,500

15

7

Pizza Warehouse

2500

52,500

21

3

Super Clips

1500

25,500

17

6

30 1/2 Flavors

1500

28,500

19

4

S-Mart

12,000

180,000

15

8

WalVerde Drugs

6000

147,000

24.5

1

Multigular Wireless

1000

22,250

22.25

2

 

So we select projects based upon their ranking until we run out of space.  This combination is shown below:

 

WalVerde Drugs

  6000

147,000

24.5

1

Multigular Wireless

1000

22,250

22.25

2

Pizza Warehouse

2500

52,500

21

3

30 1/2 Flavors

1500

28,500

19

4

Videos Now

4000

70,000

17.5

5

Total

15,000

$320,250

 

 

 

But notice that this combination leaves 1000 square feet unleased.  We therefore should look to see if there is a combination that leases more space and offers a higher monthly cash flow.  If we forgo renting to Videos Now and instead rent to both Super Clips and Gords Gym we will obtain a higher monthly cash flow.  The optimal combination is shown below:

 

WalVerde Drugs

  6000

147,000

24.5

1

Multigular Wireless

1000

22,250

22.25

2

Pizza Warehouse

2500

52,500

21

3

30 1/2 Flavors

1500

28,500

19

4

Super Clips

1500

25,500

17

6

Gords Gym

3500

52,500

15

7

Total

16,000

$328,250

 

 

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

17) Consider the following list of projects:

 

Project

Investment

NPV

A

405,000

18,000

B

600,000

90,000

C

375,000

60,000

D

450,000

   6000

E

525,000

30,000

F

225,000

30,000

G

240,000

27,000

H

600,000

60,000

I

150,000

12,000

J

270,000

30,000

 

You are given a budget of only $1,800,000 to invest in projects.  Which projects will you select, in what order will you select them, and why?

Answer: 

Project

Investment

NPV

PI

   Rank

A

405,000

18,000

0.0444

9

B

600,000

90,000

0.15

2

C

375,000

60,000

0.16

1

D

450,000

6000

0.0133

10

E

525,000

30,000

0.0571

8

F

225,000

30,000

0.1333

3

G

240,000

27,000

0.1125

4

H

600,000

60,000

0.1

6

I

150,000

12,000

0.08

7

J

270,000

30,000

0.1111

5

 

 

 

 

 

 

Beginning

Project

Cost

Ending

 

$1,800,000

C

$375,000

$1,425,000

 

$1,425,000

B

$600,000

$825,000

 

$825,000

F

$225,000

$600,000

 

$600,000

G

$240,000

$360,000

 

$360,000

J

$270,000

$90,000

 

                 

 

Diff: 3

Section:  7.5 Project Selection with Resource Constraints

Skill:  Analytical

 

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
------
Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
------
PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

------

For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

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