Question

If you sell a share of stock for $45 today that you purchased for $26 three years ago, what was your annual return over the three years?

a. 73%

b. 24%

c. 20%

d. 36%

Our measure of free cash flow (FCF) accounts for working capital by:

a. increasing FCF by the amount of working capital

b. decreasing FCF by any increase in the level of working capital

c. lowering working capital by subtracting the level of working capital

d. this adjustment is already made in the income statement

What are some potential drawback of using accounting rates of return for capital budgeting decisions?

a. the correct hurdle rate to use is arbitrary

b. depreciation expense may have a large impact on the accounting rate of return

c. the method has no implicit risk adjustment

d. all of the above

Consider an investment with an immediate outflow of $5,000 followed by annual inflows of $1,500 for the next four years. What is the project’s IRR?

a. 15.3%

b. 20%

c. 7.71%

d. 2.57%

Answer 1

b. 24% [That is, ($45-$24)/$24 x 1/3]

b. decreasing FCF by any increase in the level of working capital

d. all of the above

c. 7.71% [Because, at this rate, the NPV is 0]

Hope this helps