QUESTION 1
Which of the following statements is FALSE?
○ About 75% of firms surveyed used the NPV rule for making investment decisions.
○ 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.
○ To decide whether to invest using the NPV rule, we need to know the cost of capital.
○ NPV is positive only for discount rates greater than the internal rate of return.
QUESTION 2
A sole proprietorship is owned by:
○ one person.
○ two or more persons.
○ shareholders.
○ bankers.
QUESTION 3
Which of the following statements is FALSE?
○ The process of moving a value or cash flow forward in time is known as compounding.
○ The effect of earning interest on interest is known as compound interest.
○ It is only possible to compare or combine values at the same point in time.
○ A dollar in the future is worth more than a dollar today.
QUESTION 4
Which of the following statements is FALSE?
○ The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.
○ Most car loans, mortgages, and some bonds are annuities.
○ A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
○ An annuity is a stream of N equal cash flows paid at irregular intervals.
QUESTION 5
What is corporate governance?
QUESTION6
In mid-2015, Qualcomm Inc. had $11 billion in debt, total equity capitalization of $89 billion, and an equity beta of 1.43 (as reported on Yahoo! Finance). Included in Qualcomm's assets was $21 billion in cash and risk-free securities. Assume that the risk-free rate of interest is 3% and the market risk premium is 4%.
(a) What is Qualcomm's enterprise value?
(b) What is the beta of Qualcomm's business assets?
(c) What is Qualcomm's WACC?
QUESTION7
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an assetbeta of 0.53, expects to generate free cash flow of $76 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.14, expects to generate free cash flow of 44 milion this year, and anticipates a 2% perpetual growth rate. Suppose the risk-free rate is 2%and the market risk premiumis 4%.
a. Estimate the value of each division.
b. Estimate Weston's curent quity beta and cost of cpial. Isthis costo capial usefulforvaluing Weston's projects? How is Weston's equity betalikely to change over time?