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Answer= Dividends + change in price / by beginning price 44. The zero-coupon method is used to determine the fair value of Answer= Interest rate swaps 45. Which tool would most likely be used to determine the best course of action under conditions of uncertainty? Answer= Expected value (EV) 46. Which of the following describes an option? Answer= A contract that allows the holder to purchase a specified quantity of a financial instrument at a specified price. 47. The calculation of depreciation is used in the determination of the net present value of an investment for which of the following reasons? Answer= Depreciation increases cash flow by reducing income taxes 48. Under frost-free conditions, Ball Cultivators expects its strawberry crop to have a $120,000 market value. An unprotected crop subject to frost has an expected market value of $80,000. If Ball protects the strawberries against frost, then the market value of the crop is still expected to be $120,000 under frost-free conditions and $180,000 if there is a frost. What must be the probability of a frost for Ball to be indifferent to spending $20,000 for frost protection? Answer= 180,000-80,000= 100,000 100,000*.200 49. A company has $2,000,000 of financing available for new investment projects. If only one project may be selected, which should the company undertake? Answer= Project C 50. Assume that management of Trayco has generated the following data about an investment project that has a five-year life: Assume that Trayco’s marginal tax rate is 30% and all cash flows at the end of the year. What is the amount of the after tax cash flow in year 2? Answer= 27,000 (add back depreciation to cash flow) 51. It is assumed that cash flows are reinvested at the rate earned by the investment in which of the following capital budgeting techniques? Answer= IRR/yes — NPV/no 52. The company has 2,000,000 of financing available for new investment projects. The investment project with the highest excess profitability index is Answer= B 53. Which of the following describes a normal yield curve? Answer= Upward sloping 54. Which of the following factors does not affect the variance of a portfolio? Answer= The expected market rate 55. A project has an initial outlay of $1,000. The projected cash inflows are Yr 1 = $200 Yr 2 = $200 Yr 3 = $400 Yr 4 = $400 What is the investment’s payback period? Answer= 3.5 yrs 56. What is the formula for calculating the profitability index of a project? Answer= Divide the present value of the annual after-tax cash flows by the original cash invested in the project 57. Axel Corp. is planning to buy a new machine with the expectation that this investment should earn a discounted rate of return of at least 15%. This machine, which costs $150,000 would yield an estimated net cash flow of $30,000 a year for 10 years, after income taxes. In order to determine the net present value of buying the new machine, Axel should first multiply the $30,000 by which of the following factors? Answer= 5.109 (Present value of an ordinary annuity of $1) 58. Polo Co. requires higher rates of return for projects with a life span greater than five years. Which of the following capital budgeting techniques can readily accommodate this requirement. View Full Document