Question

1. A firm is considering a project that has the following estimated cash flows and weighted average cost of capital (WACC). What is the project's net present value?

WACC: 10.00%

Year Cash flow

0 -$1,050

1 $500

2 $400

3 $300

A. -$47.38

B. $39.48

C. -$29.61

D. $43.27

E. -$39.48

2. Which of the following statements is CORRECT?

A. A downward sloping yield curve for U.S. Treasury securities is called a normal yield curve.

B. The maturity risk premiums included in the interest rates of U.S. Treasury bonds are due primarily to the fact that the probability of default is higher on long-term U.S. Treasury bonds than on corporate bonds.

C. Liquidity premiums are larger for corporate bonds than for U.S. Treasury bonds.

D. Default risk premiums are generally highest on short-term U.S. Treasury bonds.

E. 10 year AA rated corporate bonds normally have a lower yield to maturity than 10 year U.S. Treasury bonds.

3. A stock with below-average market risk will normally be more volatile than an average stock, and its beta will be greater than 1.0.

A. True

B. False

Answer 1

YEAR 1 Cash flow pv @ 10% -$1,050 1.000 $500 0.9091 $400 0.8264 $300 0.7513 NPV of the project discounted value -$1,050.00 $454.55 $330.58 $225.39 -$39.48