Quiz Answers

Module 2
Question 1
0 out of 0 points
This online quiz is an individual assessment. Your answers should be your own work and should not be
the result of work done by others.
Selected
Answer: I UNDERSTAND and AGREE that this is an individual assessment and will submit
only my work. I confirm that I have read all the instructions carefully and understand
the need to follow these precisely for the quizzes. I have read:
 the math pointers slides (located in Module 01)
 the Online Quiz Details and Instructions (located in Assessment; Online Quizzes)
 the Quiz Review Instructions (located in Assessment; Online Quizzes)
 Getting Started (located in Unit Details)
 A Suggested Weekly Study Plan (located in Unit Details)
Answers:
I UNDERSTAND and AGREE that this is an individual assessment and will submit
 I DECLINE and will contact the course coordinator by email immediately.
 Question 2
0.5 out of 0.5 points
The difference between a nominal interest rate and an effective interest rate is expected
inflation.
Selected Answer: False
Answers: True
False
 Question 3
2 out of 2 points
What is the Present Value of an amount of $4,000 to be received in 3 years if the rate is 13% p.a.? Your
answer should be calculated to the nearest dollar. Do not include the dollar sign when entering your
answer.
Selected Answer: 2,772
Correct Answer: 2,772 ± 2
 Question 4
2 out of 2 points
What is the Future Value in 2 years of an amount of $2,000, if the rate is 12% p.a.? Your answer should
be calculated to the nearest dollar. Do not use the $ sign when entering your answer.
 Question 5
0 out of 2 points
What is the present value of an annuity of 8 annual payments of $1,000 if the first cash flow occurs in
one year’s time? The rate is 13% p.a. Calculate your answer to the nearest dollar. Do not use the $ sign
when you submit your answer.
Selected Answer: 78
Response Feedback: This is the present value of an ordinary annuity. Use PV = 1000 x (1-(1+i)-n)/i
 Question 6
2 out of 2 points
What is the future value at the time of the final payment of an annuity of 11 annual payments of
$1,000 if the first cash flow occurs in one year’s time? The rate is 5% p.a. Calculate your answer to the
nearest dollar. Do not use the $ sign when you submit your answer.
 Question 7
2 out of 2 points
What is the present value of an infinite series of cash flows of $5,000 pa, if the relevant
rate is 10%p.a.? The first cash flow is at the end of the first year. Calculate to the
nearest dollar.
 Question 8
2 out of 2 points
The annual nominal rate is jm = 0.15pa. What is the effective annual rate as a percentage to two decimal
places? The number of compounding periods is 11. Enter your answer as a decimal eg 17.42% = .1742
to four decimal places. Accuracy of one basis point. Tip: use excel to get the required accuracy.
Selected Answer: 0.1607
Correct Answer: 0.1607 ± 0

 Question 9
0 out of 2 points
What is the present value of a series of growing cash flows, where the first cash flow
(at the end of the first period) is $400 the required rate is 12% and the growth rate is
5%?
Response Feedback: Use the constant growth formula. P = D1/(r-g)

 Question 10
You are evaluating two annuities. They are identical in every way except that one is an ordinary annuity
and one is annuity due. Which of the following is false?
Selected
Answer: The annuity due must have the same present value as the ordinary annuity.
Answers:
The annuity due must have the same present value as the ordinary annuity.
The ordinary annuity must have a lower present value than the annuity due.
The two annuities will differ in present value by a factor of (1+r).
The annuity due and the ordinary annuity will make the same number of total
payments over time.
The ordinary annuity must have a lower future value than the annuity due.
Response Feedback: correct
 Question 11
0 out of 0.5 points
When finding the future value (FV7) of a deferred annuity of five annual payments of
$1000, with the first payment at the beginning of year four, which of the following is
correct? The relevant rate 10% pa.
Selected b.
Answer: FV7 = 1000 x FVIFA(5,.1) x (1.1)-1
Answers: a.
FV7 = 1000 x FVIFA(5,.1)
b.
FV7 = 1000 x FVIFA(5,.1) x (1.1)-1
c.
FV7 = 1000 + 1000 x (1.1) + 1000 x (1.1)2 + 1000 x (1.1)3 + 1000 x
(1.1)4
d.
Both (a) and (c) are correct.
e.
FV7 = 1000 x FVIFA(7,.1).
Response Feedback: incorrect
 Question 12
0 out of 0.5 points
Interest earned on the reinvestment of previous interest payments is known as:
Selected Answer:
interest on interest
Answers:
both compound interest and interest on interest
accumulated interest
compound interest
simple interest
interest on interest
 Question 13
The expression (1+r)t is also called the:
Selected Answer:
future value interest factor
Answers: present value interest factor
discounting formula
future value interest factor
interest rate formula
present value formula

 Question 14
0 out of 0.5 points
When finding the present value of a deferred annuity of five annual payments of $1000, with the first
payment at the beginning of year four, which of the following is correct? The relevant rate 10% pa.
Selected Answer:
PV0 = 1000 x PVIFA(.1,5) x (1.1)-3
Answers:
PV0 = 1000 x PVIFA(.1,7) – 1000 x PVIFA(.1,2)
PV0 = 1000 x PVIFA(.1,5) x (1.1)-3
PV0 = 1000 x PVIFA(.1,5)
PV0 = 1000 x PVIFA(.1,5) ÷ (1.1)4
PV0 = 1000 x PVIFA(.1,5) x (1.1)-4

Response incorrect. Draw a cash flow map to help solve the problem. Remember the timing
Feedback: convention used in this unit.
 Question 15
A new finance graduate has just commenced employment. The graduate plans to take
the job for five years before seeking another position, and has been offered a choice
of the following salary packages. The appropriate discount rate is 10%. Which is the
preferred salary package in present value terms?
Selected
Answer: $100,000 today plus an annual salary of $25,000. The first annual
payment is today. (A total of six equal salary payments).
Answers: $25000 salary each year (five end of year payments) plus a sum of
$125000 at end of year five.
A commission of 30% of sales. Yearly commissions are expected to be,

Year 1 $45,000; Year 2 $52,500; Year 3 $54,000; Year 4 $ 60,000; Year
5 $63,000
$100,000 today plus an annual salary of $25,000. The first annual

payment is today. (A total of six equal salary payments).
$210,000 today and no further income
Annual salary of $56,700 with payments commencing in one year and

five payments in total
 Question 16
2 out of 2 points
Mooncorp Insurance has quoted you an annual premium to insure your car of $2400. You are offered a
15% discount if you pay the lump sum immediately. You can also pay the account by making 12 equal
end of month payments of $200. The effective annual opportunity cost of paying monthly as a
percentage to two decimal places is? (Accurate to one basis point.)
Selected Answer:
35.97%
Answers: 15%
0% because this is a discount and you are not being charged interest
31.12%
cannot be calculated
35.97%
2.59%
 Question 17
A nominal annual rate of j12 = 12%pa converts to an annual effective rate of 12.68%. The monthly rate
must be 12.68%/12 = 1.06% .
Calculations are accurate to the nearest basis point.

Answers: True
False
Module 3
Question 1
0 out of 0 points
Selected
Answers:
 Question 2
In an efficient market the purchase of financial assets would represent a zero NPV
project.
Selected Answer: True
Answers: True
False
 Question 3
A non-redeemable preference share is paying a constant dividend of $10. What is the current price if
the market yield for such shares is 14 %? Your answer should be calculated to the nearest cent, e.g.
23.167 should be entered as 23.17. Do not enter the $ sign.
Correct Answer: 71.43 ± 0.02
 Question 4
The ratio of earnings per share to share price is called the P/E ratio.
Answers: True
False
 Question 5
Fab Co has just paid a dividend of $1.4. The company pays dividends annually. Dividends are expected
to grow at 12% pa for the next two years and for 4% thereafter for the foreseeable future. How much
will the dividend be at the end of the fifth year? Answer to the nearest cent, e.g $5.678 should be
entered as 5.68. Do not enter the $ sign.
 Question 6
Polycorp is about to issue debentures. The following information is available.

1. The coupon rate is 8% pa (or .08). Coupons are paid annually
2. The yield to maturity (YTM) is 0.06 pa
3. The face value is $100
4. The term is 3 years
How much can the debentures be issued for? Your answer should be accurate to the nearest
cent. Note that the YTM is expressed as a decimal, so .06 is 6% pa.
 Question 7
Polycorp has just paid a dividend of $2. The company pays dividends annually. Dividends are
expected to grow at 0.1 pa for the next two years and for 0.03 thereafter for the foreseeable
future. At what price should the shares sell for at the end of year two if the required rate of
return is 0.17? Answer to the nearest cent, e.g $5.678 should be entered as 5.68. Do not
enter the $ sign. Note that all growth rates and the required rate are expressed as a decimal,
so .06 is 6% pa.
 Question 8
Polycorp wishes to issue a 90 day bank bill with a face value of $2,000,000. If the current 90 day rate is
8% how much will Polycorp issue the bill for. Calculate to the nearest dollar.
Selected Answer: 1,961,311
Correct Answer: 1,961,311 ± 3
 Question 9
What is the price today of a zero coupon bond with a face value of $4,000 if the relevant
market yield is 9% pa and with 4 years to maturity? Calculate the price to the nearest dollar.
 Question 10
FV = $100
Price = $97.23
Coupon Rate = 8.5%
Term = 8 years
Given the information above calculate the yield to maturity (YTM). Calculate as a percentage correct to
two decimal places. Do not enter the percentage (%) sign.

Correct Answer: 9
Answer range +/- 0.02 (8.98 - 9.02)
 Question 11
The amount owing on a housing loan is equal to the present value of the remaining
payments.
Answers: True
False
 Question 12
There is an inverse relationship between interest rates (yields) and:
Selected Answer:
bond prices
Answers: face value
term to maturity
bond prices
coupon
both coupon and face value
 Question 13
According to Standard and Poor's a long term debt rating of AAA means the
organisation has "A strong capacity to pay".
Answers: True
False
 Question 14
Which of the following statements is incorrect?

Selected
Answer: If the coupon rate is greater than the yield a debenture sells for less
than its face value.
Answers: If the yield is less than the coupon then a bond sells for more than its
face value.
If the coupon rate is greater than the yield a debenture sells for less
than its face value.
If the yield is greater than the coupon a bond sells for less than face
value.
If a bond is selling at a premium then the yield is less than the coupon.
If a debenture is selling at a discount then the yield is greater than the
coupon.
 Question 15
The constant growth formula breaks down when ke < g.

Answers: True
False
 Question 16
When Polycorp issued its debentures three years ago, they had six years remaining to maturity. Using
the following information, calculate the price of the debentures today.
Face value = $100

Coupon Rate = 0.06
Yield = 0.09
Both the coupon rate and the yield are expressed as decimals, e.g. 12% pa is expressed as .12
Calculate the price accurate to two decimal places. Do not enter the $ sign.
 Question 17
1 out of 1 points
From the following information calculate the price of the stock. The annual dividends
for years 3, 4 and 5 will be $1.00, $1.20 and $1.30, respectively. After year 5,
dividends are expected to grow by 3% pa forever. The required rate of return is 10%
pa.
Selected Answer:
$14.26
Answers: $22.00
$14.26
$1.57
$13.18
$10.00
 Question 18
1 out of 1 points
When interest rates are positive, a standard fixed coupon bond with a coupon rate of
10% pa is selling at a discount. What is the yield?
Selected Answer:
11%
Answers: 9%
10%
6%
11%
8%
 Question 19
Interest rates quoted in the Financial Press for 90 day bank bills and for 10 year
government bonds are annual effective rates.
Answers: True
False
 Question 20
1 out of 1 points
A bond has a 10 percent coupon rate and a $100 face value. Interest is paid semi-annually and the bond
has 20 years to maturity. If investors require a 12 percent pa yield, what is the bond's value?
Selected Answer:
$84.95
Answers:
$84.95
$48.95
$89.95
cannot be determined not enough information
$80.95
 Question 21
1 out of 1 points
A friend of QUT wishes to establish a trust to pay a perpetual scholarship in the

memory of his mother. The scholarship would be offered every three years with the
first one awarded immediately. The amount of the scholarship would be $30000. How
much would he have to pay into a trust fund now to meet its commitments, if the fund
can earn returns of 5% per annum?
Selected
Answer: 220325
Answers: 600000
630000
190325
Unable to calculate because you need a three year rate and this is not
given.
200000
230000
220325
Module 4
Question 1
0 out of 0 points
Selected
Answers:
 Question 2
1 out of 1 points
Which of the following statements about NPV and IRR is true for conventional projects?
Selected
Answer: The internal rate of return is equal to the required rate of return when the net present
value is equal to zero.
Answers:
The internal rate of return is equal to the required rate of return when the net present
value is equal to zero.
The internal rate of return is greater than the required rate of return when the net
present value is negative.
None of the other given options is correct.
The internal rate of return is less than the required rate of return when the net present
value is positive.
The internal rate of return is never equal to the required rate of return.
 Question 3
An NPV of zero means that the project does not make any profit.
Answers: True
False
 Question 4
The NPV method measures change in value and is thus easy to align with the firm
objective of maximizing value.
Answers: True
False
 Question 5
0 out of 2 points
Calculate the NPV of a project that has an outlay of $200,000 and has annual net cash flows of $70000
per year over 9 years. The project has a salvage value (disposal value) of 10% of its original value. The
required rate of return for projects of similar risk is 0.1.
Note that the rate of return is quoted as a decimal, e.g. 12% p.a. is written as .12 in the question above.
Your answer must be accurate to the nearest dollar. Do not enter the $ sign when entering your
answer. If your NPV is negative enter a minus sign before typing your answer, e.g. -2345.
Response NPV = -Outlay + the sum of the present values of the net cash flows. The last cash
Feedback: flow should include the salvage value.
NPV = -Outlay +CF[1-(1+r) -t]/r + SV/(1+r) t

Where
CF is the annual net cash flow

t = number of years
r = rate as a decimal
SV = Salvage Value = 10% of Outlay
 Question 6
The flexibility that a manager has in choosing whether to undertake or abandon a
project or to change the way a project is managed is called a real option.
Answers: True
False
 Question 7
2 out of 2 points
Year 0 1 2 3 4 5 6
Cash Flow -110000 30000 40000 20000 80000 20000 20000
Given the cash flows in the table above, calculate the payback period assuming the cash flows in years
1 to 4 occur evenly throughout the year. The required rate of return is 12%.
Answer in years accurate to two decimal places.
 Question 8
Two projects are said to be independent if the acceptance of one precludes the
acceptance of the other.
Answers: True
False
 Question 9
2 out of 2 points
Given the following information calculate the Accounting Rate of Return (ARR gross).
Outlay = 200000
Annual Cash Flow = 80000 per year over four years
Life = 4 years
Rate = 0.11, as a decimal
Assume no taxes. Your answer must be accurate to the nearest percentage. Enter your
answer as a percentage. Enter the % symbol e.g. 17% Note: do not leave a space before the
percentage (%) symbol. Use straight line depreciation over the life of the project.
Selected Answer: 15%
Correct Answer: 15 ± 0 (%)
 Question 10
Descartes's rule of sign states that there can be as many positive solutions to IRR as
there are changes in sign of the cash flows of the project.
Answers: True
False
 Question 11
0 out of 2 points
Calculate the monthly repayment on the following housing loan:

Loan $600000
Years 19
Rate 6% or .06 pa compounded monthly
Answer to the nearest dollar.
Response Feedback: R = Loan/PVIFA(y*12,.005)
 Question 12
One outcome of the post-completion audit is that unsuccessful projects are identified at
the earliest possible time, leading to their abandonment and subsequent savings to the
firm.
Answers: True
False
 Question 13
0 out of 2 points
Project A has an NPV of 100000. The project is financed by borrowing at 7%pa. The cost of capital for
Project A is 0.08. This rate is expressed as a decimal, e.g. so that .12 is equal to 12%. The project has 8
year life. Calculate the Annual Equivalent (AE). Your textbook calls this EAV, Equivalent Annual Value.
Calculate to the nearest dollar.
 Question 14
1 out of 1 points
Benefit-cost ratio is calculated by:
Selected Answer:
dividing the present value of future net cash flows by the initial outlay.
Answers: dividing the NPV by the outlay.
dividing the present value of future net cash flows by the initial outlay.
dividing the outlay by the present value of future net cash flows.
dividing the present value of cash flows by the working capital.
dividing the total cash flows by the initial outflow.
 Question 15
It can be shown that the present value of a stream of annual EVA's gives the same
answer as NPV.
Answers: True
False
 Question 16
1 out of 1 points
Management wishes you to consider investing in one of the following projects (cash flow forecasts
provided). Using the Accounting Rate of Return (ARR) method, which would you choose?
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Project A ($800) $50 $100 $200 $300 $350
Project B ($800) $350 $300 $200 $100 $50

Assume a target ARR of 4.5%pa.
Selected Answer:
Either project A or project B.
Answers: Project A.
Either project A or project B.
Neither project A nor project B.
Cannot be determined.
Project B.
 Question 17
The IRR method is easier to use because it does not require the calculation of the cost
of capital.
Answers: True
False
 Question 18
2.25 out of 3 points
Project A has the following cash flows.
0 1 2 3 4 5
-60000 20000 20000 20000 30000 30000
Calculate the NPV, the IRR, the PVI, and the ARR for Project A. Enter your answers in the table below.
The required rate of return is 8%.
Be sure to use the "%" symbol when entering the IRR and the ARR
NPV To the nearest dollar [npv]

IRR To the nearest percent [irr]
PVI To two decimal places [pvi]
ARR gross To the nearest percent [arr]
Specified Answer for: npv 34010
Specified Answer for: irr 26%
Specified Answer for: pvi 1.57

Specified Answer for: arr 29%
Correct Answers for: npv
Evaluation Method Correct Answer Case Sensitivity
Exact Match 34010
Correct Answers for: irr
Exact Match 26%
Correct Answers for: pvi
Exact Match 1.57
Correct Answers for: arr
Exact Match 20%

 Module 5
 Question 1
0 out of 0 points
Selected
Answers:
 Question 2
1 out of 1 points
What is the incremental cash flow for a company that foregoes $6,000 pa in rental for
factory space in order to mamnufacture a product that will return net cash inflows os
$20,000 pa?
 Question 3
If the firm objective is to maximize value, then soft capital rationing is a sub-optimal
strategy.
Answers: True
False
 Question 4
Given the information in the table below, if management imposes a limit of $500,000 on capital
investments, which of the following project combinations should it accept? Assume that the projects are
not divisible.
Selected Answer:
Projects F and D.
Answers:
Projects F and D.
Projects C, D and A.
Projects E and F
Projects B, C and D.
Projects F and C.
All of the projects.
 Question 5
1 out of 1 points
A property development company plans to demolish the building on a site it already owns, and then
build a convenience store. Which of the following items should be included as incremental cash flows
when the project is evaluated? There may be more than one answer.
the current market value of the property
the cost of demolishing the old building

Answers: the original market value of the property (purchase price)
the current market value of the property
the cost of demolishing the old building

the cost of a new water and electric power connections installed three months ago
a portion of the cost of leasing cars used by existing head office executives
money that has already been spent on architectural concept plans for the new building.
 Question 6
1 out of 1 points
Which of the following should be omitted from the projected cash flows for an investment proposal?
Selected Answer:
Sunk costs.
Answers: Salvage value.
Sunk costs.
None of the given answers should be omitted.
Incremental cash flows.
Project outlay.
 Question 7
1 out of 1 points
Which of the following statements presents a correct treatment of inflation in project evaluation?
Selected
Answer: Estimating cash flows without adjustment for anticipated price changes and
discounting them by the real cost of capital.
Answers: Estimating cash flows based on constant prices and discounting them by the nominal
cost of capital.
Estimating cash flows without adjustment for anticipated price changes and
discounting them by the real cost of capital.
Estimating cash flows based on anticipated price changes and discounting them by
the real cost of capital.
Estimating cash flows based on anticipated price changes and discounting them by
the expected inflation rate.
None of the given options.
 Question 8
If an investment costing $2,000 is expected to generate real cash flows of $900 p.a. for three years,
prices are expected to increase at a rate of 5% p.a., and the nominal cost of capital is 15%, what is the net
present value of the investment? Answer to the nearest dollar.
Selected Answer:
$257
Answers: cannot be determined.
$55
$238
$257
$451
 Question 9
1 out of 1 points
Which of the following methods should be applied when considering independent projects with different
lives?
Selected
Answer: The net present value method over the normal life is adequate.
Answers: None of the given answers.
The constant chain of replacement method only.
Either the constant chain of replacement method or the least common multiple
method only.
The net present value method over the normal life is adequate.
The constant chain of replacement method using the real cost of capital only.
 Question 10
Maximising profit is the same as maximising value.

Answers: True
False
 Question 11
1 out of 1 points
The constant chain of replacement assumption is used when:
Selected
Answer: comparing mutually exclusive projects with unequal economic lives and
replacement
Answers: comparing mutually exclusive projects with unequal economic lives
the life of a project cannot be ascertained with certainty.
comparing mutually exclusive projects with unequal economic lives and

replacement
comparing independent projects.
comparing mutually exclusive projects.
 Question 12
Given the data below, calculate the net present value of an infinite chain of replacement using the
equivalent annual value method. Assume the cost of capital is 11% p.a.
Initial Outlay Year 1 Year 2 Year 3

-$10,000 $10,000 $20,000 $30,000
Selected Answer:
138304
Answers: 15213
cannot be determined.
$14,831
$15,344
$153,444
$38,159
138304
 Question 13
Given the following information and options, calculate how many years this project should be run before
it is retired. Assume the cost of capital is 10% p.a. Maximum life is five years.

Net Cash Flows ($) (10,000) 2,200 3,000 3,500 2,500 2,000
Retirement Values ($) 6,000 5,000 4,000 3,000 1,000
Selected Answer:
Four years.
Answers: One year.
Five years.
Two years.
Three years.
Four years.
 Question 14
1 out of 1 points
Copy of Given the following information and options, calculate the optimal life of the project. Assume
the cost of capital is 10% p.a. Maximum life is five years and replacement of like with like..

Net Cash Flows ($) (10,000) 2,200 3,000 3,500 2,500 2,000
Retirement Values ($) 6,000 5,000 4,800 3,000 1,000
Selected Answer:
Three years.
Answers: Five years.
Four years.
Three years.
Two years.
One year.
 Question 15
Use the following information on two mutually exclusive projects.
0 1 2 3 4
A -2000 1500 1500
B -4800 1800 1800 1800 1800
Assume a discount rate of 11% pa and replacement of like with like into the foreseeable future.
Which of the following statements is correct?
Selected
Answer: Project A should be selected because it has an NPV of an infinite chain of replacement
of $3019 compared with project B which has an NPV of $2298.
Answers: Project A should be selected because it has an IRR of 32% compared with project B
which has an IRR of 18%.
Project A should be selected because it has anAE of $302 compared with project B
which has an AE of $253.
There is not enough information to make a valid decision.
Project A should be selected because it has an NPV of an infinite chain of replacement

of $3019 compared with project B which has an NPV of $2298.
Project B should be selected because it has an NPV of $784 compared with project A
which has an NPV of $569.
Project B should be selected because it has an NPV over the LCM (least common
multiple) of lives of $784 compared with project A which has an NPV of $1030.
 Question 16
What is the present value of a series of payments of $4000 every three years in perpetuity with the first
payment made immediately, if the annual rate is 10% per annum?
Answer to the nearest dollar. Do not enter any dollars signs or minus signs.
Selected Answer: 16085

Correct Answer: 16,085
Answer range +/- 4 (16081.0 - 16089.0)
 Question 17
For mutually exclusive projects, with unequal lives and replacement, the Annual
Equivalent [AE] method will always pick the best project even though it does not
measure the increase in value.
Answers: True
False
 Question 18
Calculate the AE given a project with an outlay of -2000 and cash flows of 1500 per year for 3 years.
The discount rate is 0.12. The rate is given as a decimal (eg .12 is 12%). Answer to the nearest dollar. Do
not enter the dollar sign.
Correct Answer: 667 ± 5
 Question 19
In an efficient market on Ex-Dividend day the theoretical share price should fall by on average the
amount of the dividend (assume no friction from taxes).

Answers: True
False
 Question 20
The present value of an infinite stream of AEs of the project is equal to the net present
value of the constant chain of replacement of the project in perpetuity.
NPV∞ = NPV*(1+k)n/((1+k)n-1).
Answers: True
False

 Module 6
 Question 1
0 out of 0 points
Selected
Answers:
 Question 2
Identify the items that will be ignored when estimating the after tax cash flows of the project.
I) cash flow from sales
II) financing charges
III) depreciation
IV) loss on sale of the asset
V) residual cash flow
VI) investment allowance
Selected Answer:
financing charges
Answers: loss on sale of the asset and investment allowance
financing charges
residual cash flow and investment allowance
financing charges and depreciation
loss on sale of the asset and residual cash flow

 Question 3
The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called:
Selected Answer:
depreciation tax shield
Answers: after-tax depreciation deduction
none of the given answers
the economic value savings
depreciation tax shield
after-tax terminal value savings
 Question 4
Use the following information to estimate the taxable income for year 5.
Sales in units
Year
1 10,000
2 20,000
3 40,000
4 45,000
5 41,000
6 25,000
Unit price for sales in years 1 to 3: $50 and for years 4 to 6: $45
Variable Cost (VC) : $25 per unit
Fixed Cost (FC) : $50 000 per year
Initial Investment: $600 000
Salvage: $50 000 at the end of year 6
tax rate: 34%
cost of capital 15%
depreciation method: prime cost to zero
Selected Answer:
$670,000
Answers: $875,000
$720,000
$670,000
$770,000
$650,000
 Question 5
In Australia the rate for the diminishing value method is ________ of the prime cost for assets
acquired after 10 May 2006.
Selected Answer:
200 percent
Answers: 150 percent
There is no relationship between prime cost and diminishing value rates.
125 percent
200 percent
100 percent
 Question 6
1 out of 1 points
Which of the following is incorrect:
Selected
Answer: The tax savings from an investment allowance is equal to I x T ÷ A, where I equals the
amount of eligible capital expenditure, A the rate of investment allowance and T equals
the tax rate.
Answers: The depreciation tax shield for a period is caclulated as D x T, where D = the amount
of depreciation and T equals the tax rate.
The tax savings from an investment allowance is equal to I x T ÷ A, where I equals the
amount of eligible capital expenditure, A the rate of investment allowance and T equals
the tax rate.
The after tax cash flow of a non-cash expense in any period is E x T, where E
equals non-cash expense and T equals the tax rate.
The after tax cash flow from cash revenue in any period is R x (1-T), where R equals
revenue and T equals the tax rate.
The tax savings from a Loss on Sale is equal to L x T, where L equals loss and T equals
the tax rate.
 Question 7
1 out of 1 points
A Loss on Sale occurs when:
Selected Answer:
Initial Cost minus Accumulated Depreciation > Salvage Value
Answers: Salvage Value is zero.
Salvage Value > Initial Cost minus Accumulated Depreciation
Initial Cost minus Accumulated Depreciation > Salvage Value
Salvage Value > Depreciation in the last year
Salvage Value < Depreciation in the last year
SV > Written Down Value
Written down value is < Salvage Value
 Question 8
When replacing Project A with Project B the incremental impact on the depreciation deduction is given
by:
Selected
Answer: Depreciation Of Project A minus Depreciation of Project B
Answers: Depreciation is not a cash flow therefore it can be ignored.
Depreciation of Project B only is deducted. Project A's depreciation can be ignored

because it is being replaced.
Depreciation Of Project A plus Depreciation of Project B
Depreciation Of Project A minus Depreciation of Project B
Depreciation Of Project A divided by Depreciation of Project B.
 Question 9
Given the following, calculate the written down value at the end of the fourth year.
Cost: $600000
Diminishing Value Rate (Reducing Value Rate): 20%
Calculate to the nearest dollar.Do not enter any commas or dollar signs (eg $200,000
should be entered as 200000).
Answer range +/- 50 (245710 - 245810)
 Question 10
The correct treatment for changes in working capital (net current assets) is
Selected
Answer: Increases in working capital are treated as cash outflows and do not affect tax.
Answers: Decreases in working capital are treated as cash outflows and do not affect tax.
Working capital is not relevant for cash flow purposes or for taxation
Increases in working capital are treated as cash outflows and do not affect tax.
Increases in working capital are treated as cash outflows and are deducted for tax
purposes over the life of the project.
Decreases in working capital are treated as cash outflows and are deducted for tax
purposes over the life of the project.
 Question 11
1 out of 1 points
Which of the following statements is correct? Assume a positive salvage value. Include any gain or loss
in your analysis. Assume the same discount rate for all options.
Selected
Answer: Both Diminishing value and Prime cost give the same total deductions over the life of
the project.
Answers: Prime Cost Depreciation down to zero always gives the highest present value of tax
savings for depreciation.
Prime Cost Depreciation down to salvage value always gives the highest present
value of tax savings for depreciation.
Diminishing Value Depreciation always gives the lowest present value of tax savings
for depreciation.
Both Diminishing value and Prime cost give the same total deductions over the life of
the project.
Reducing Balance Depreciation using the Prime Rate gives the highest present value
of tax savings.
 Question 12
A company is considering the purchase of equipment costing $84000 which will permit it to reduce its
existing labour cost by $21000 each year for twelve years. The company estimates that it will have to
spend $2000 every two years overhauling the equipment. The equiment may be depreciated using
straight line depreciation over 12 years for tax purposes. The company tax rate is 30 cents in the dollar
and the after corporate tax cost of capital is 10% per annum.
Assume:
1. Salvage value of zero.

2. The outlay of $84000 occurs at time zero.
3. All other cash flows including, tax payments and credits are made at the end of the year.
4. No overhaul is required in year 12.
What is the NPV to the nearest dollar? Be careful not to round until the last calculation.

Answer range +/- 25 (26349.0 - 26399.0)
 Question 13
A two-year project has been evaluated and has an NPV on an after tax basis of -$2000. On
reviewing the analysis the Finance Manager found that depreciation had been omitted from
the tax analysis. The allowable depreciation for tax purposes is $5000 for each year. Using a
tax rate of 30% and and a discount rate after tax of 12% pa, determine the correct NPV for the
project (to the nearest dollar).
Correct Answer: 535
Answer range +/- 10 (525.0 - 545.0)
 Question 14
When working out the cash flows to calculate an NPV or an IRR the project's after tax interest expense
should be subtracted from the cash flows for:
Selected Answer:
neither the NPV calculation nor the IRR calculation
Answers: the IRR calculation but not the NPV calculation
the NPV calculation but not the IRR calculation
neither the NPV calculation nor the IRR calculation
both the NPV and the IRR calculation
the before tax interest expense should be deducted to calculate both NPV and IRR
 Question 15
When evaluating a project on an after tax basis using NPV any tax losses are ignored.
Answers: True
False
 Question 16
Given the following information calculate the relevant annual Net Cash Flow After
Tax [NCFAT], needed to calculate NPV.

Answer range +/- 0 (108800.0 - 108800.0)
 Question 17
Interest paid on debt (borrowing) is tax deductible. This creates a tax shield. For this
reason the interest tax shield should be added when determing Net Cash Flows After
Tax [NCFAT].
Answers: True
False
 Question 18
For independent conventional projects NPV and IRR both select (accept/reject) the
same projects and both are consistent with the objective of the firm.
Answers: True
False
 Question 19
This is an example of the Time Disparity Problem.

Answers: True
False
Response Feedback: Correct
 Question 20
Using discounted payback. A conventional project that has a discount payback period
less than its useful life cannot have a negative NPV.
Answers: True
False
 Question 21
Installation costs are normally treated as part of the outlay for the project (cash
outflow at t = 0), but are capitalized for tax purposes (added to the value of the asset)
and charged as depreciation over the life of the project.
Answers: True
False
 Question 22
Which of the following are examples of "Real Options"
Selected
Answers: The option to make follow-on investments if the immediare investment project
succeeds.
The option to abandon a project.
The option to wait (and learn) before investing (option to delay)
Flexibility in production facilities (the option to change strategy)
Option to extend a contract

Answers:
The option to make follow-on investments if the immediare investment project
succeeds.
The option to abandon a project.
The option to wait (and learn) before investing (option to delay)
Flexibility in production facilities (the option to change strategy)
Option to extend a contract

Module 7

0 out of 0 points
Selected
Answers:
 Question 2
Which distribution can be fully described by its expected value and standard deviation?
Selected Answer:
Normal distribution.
Answers: discrete distribution
frequency distribution
Both Normal distribution and Probability distribution.
Probability distribution.
Normal distribution.
 Question 3
1 out of 1 points
Assume two securities A and B. The correlation coefficient between these two securities can be written
as:
Selected Answer:
ρa,b = Cov(Ra,Rb) /σa σb
Answers: ρa,b = Cov(Ra,Rb) /σ2a σ2b
ρa,b = Cov(Ra,Rb) /σb
ρa,b = Cov(Ra,Rb) /σa σb
ρa,b = Cov(Ra,Rb) /σa
ρa,b = Cov(Ra,Rb) σa σb
 Question 4
Which type of risk is unique to a firm and may be eliminated by diversification?
Selected Answer:
Unsystematic risk.
Answers: Total risk.
Unsystematic risk.
Non-Diversifiable Risk
Macro risk.
Systematic risk.
 Question 5
The capital market line [CML]:
Selected Answer:
describes the equilibrium risk-return relationship for efficient portfolios.
Answers: describes the equilibrium risk-return relationship for all portfolios.
describes the equilibrium risk-return relationship for efficient portfolios.
describes the equilibrium risk-return relationship for riskless portfolios.
does not have anything to do with efficient portfolios
describes the equilibrium risk-return relationship for risky portfolios.
 Question 6
2 out of 2 points
Examine the following probability distribution:
Return Probability
0.04 0.1
0.06 0.2
0.08 0.4
0.1 0.2
0.12 0.1
The mean and standard deviation are:
Selected Answer:
0.08 and .022, respectively.
Answers: 0.07 and 0.022, respectively.
0.06 and 0.0693, respectively.
0.08 and .022, respectively.
 Question 7
The benefit of diversification to an investor is:

Selected Answer:
the reduction of unsystematic risk.
Answers: the reduction of brokerage costs and risk.
the reduction of research time.
the reduction of brokerage costs.
the reduction of systematic risk.
the reduction of unsystematic risk.
 Question 8
Which of the following investments does a rational risk averse investor prefer? s = standard deviation.
Selected
Answer: Investment C: E(R) = 11%, s = 3%
Answers: None of the given options, as a rational investor would require more information
from which to make a decision.
Investment B: E(R) = 10%, s = 5%
Investment A: E(R) = 10%, s = 3%
Investment C: E(R) = 11%, s = 3%
 Question 9
2 out of 2 points
Calculate the expected return from a portfolio consisting of three securities with the following expected
returns and weights:
Expected Return Weight

Security A 0.10 40%
Security B 0.12 40%
Security C 0.14 20%
Selected Answer:
11.6%
Answers: 36%
12%
11.4%
11.6%
0.114%
 Question 10
1 out of 1 points
Increasing the amount of wealth in Asset A whilst maintaining the entire wealth invested in a portfolio
consisting of two assets only, A and B (assume that the expected return and standard deviation of both
assets are A: 0.10 and 0.03, and B: 0.15 and 0.05, respectively):
Selected
Answer: will decrease the expected return of the portfolio, but the expected return will still be
greater than if the portfolio consisted of Asset A only.
Answers:
will decrease the expected return of the portfolio, but the expected return will still be
greater than if the portfolio consisted of Asset A only.
More information is needed before the impact on expected return can be determined.
will increase the expected return of the portfolio.
will decrease the expected return of the portfolio, but the expected return will be
closer to 15% than before.
may reduce the variance of the portfolio regardless of the correlation coefficient
between Assets A and B.
 Question 11
Systematic risk represents:
Selected Answer:
risk that is not diversifiable.
Answers:
risk that is not diversifiable.
diversifiable risk.
unique risk
risk that is diversifiable.
none of the options given.
 Question 12
Which of the following is not an example of unsystematic risk?
Selected Answer:
Changes in the level of interest rates.
Answers: The chief executive officer resigns.
Changes in the level of interest rates.
The development of a new product line.
A legal suit against a company for environmental pollution.
Factory destroted by fire.
 Question 13
1 out of 1 points
Which of the following statements are correct. There may be more than one correct.
Selected
Answers: Variances are not linearly additive.
Rf has a standard deviation of zero.
The covariance of a variable with itself is its variance. Cov (Ra,Ra) = Var(Ra)
The covariance of a variable with a constant is zero. Cov(Ra.Rf) = 0
An effecient portfolio has a correlation with the market equal to one.
When combining Rf and Rm into a portfolio the proprotions must add up to one or a
humdred percent, but they do not both have to be positive.
Correlation ranges from plus one to minus one.
The market portfolio is efficient.

Answers:
Variances are not linearly additive.
Rf has a standard deviation of zero.
The covariance of a variable with itself is its variance. Cov (Ra,Ra) = Var(Ra)
The covariance of a variable with a constant is zero. Cov(Ra.Rf) = 0
An effecient portfolio has a correlation with the market equal to one.
When combining Rf and Rm into a portfolio the proprotions must add up to one or a
humdred percent, but they do not both have to be positive.
Correlation ranges from plus one to minus one.
The market portfolio is efficient.

 Question 14
2 out of 2 points
Given the information in the table below calculate the standard deviation of a portfolio combining Asset
A and Asset B in the proportions of 40% and 60%, respectively. A correlation of .5 exists between A and
B.
Asset SD Weight
A .10 .4
B .15 .6
Give your answer as a decimal accurate to three decimal places.

Correct Answer: 0.115
Answer range +/- 0.001 (0.1140 - 0.1160)
 Question 15
The covariance of a variable with itself is its standard deviation. Covariance (Ri,Ri) = Square Root of
Variance (Ri)

Answers: True
False
 Question 16
A risk-neutral investor is an investor who neither likes or dislikes risk

Answers: True
False
 Question 17
Combining two securities whose returns are perfectly positively correlated (ie correlation coefficient is
+1) results only in risk averaging and does not proved any risk reduction.

Answers: True
False
 Question 18
1 out of 1 points
With respect to portfolio theory as covered in your textbook, which of the following statements is
incorrect
Selected
Answer: all the other statements provided are incorrect
Answers:
all the other statements provided are incorrect
diversification reduces risk
two inportant assumptions of portfolio theory are: returns are normally distributed and
investors are risk averse
the effectiveness of diversification depends on the correlation or covariance between

returns on the individual assets combined into a portfolio
risk-averse investors will aim to hold portfolios that are efficient in that they provide
the highest expected return for a given level of risk
the only risk that remains in a well diversified portfolio is non-diversifiable risk
 Question 19
1 out of 1 points
The Capital Market LIne (CML) can be written as
Selected Answer:
E(Rp) = Rf + [E(Rm)-Rf]*σp/σm
Answers:
E(Rp) = Rf + [E(Rm)-Rf]*σp/σm
E(Rp) = Rf + [E(Rm)-Rf]*σm/σp
E(Rp) = Rf + [E(Rm)-Rf]*σp/σ2m
Rp = αp + β*Rm + εp
E(Rp) = Rf + [E(Rm)-Rf]*σpm/σ2m
 Question 20
1 out of 1 points
Referring to the Capital Market Line (CML) which of the following strategies has the highest exprected
return and the highest risk for the investor?
Selected
Answer: Borrow at the riskless rate and invest his or her funds, plus the borrowed money in
Rm
Answers: Invest all of her or his funds in Rm
Invest in a portfolio of 50% in Rf and 50% in Rm
Invest 75% in Rm and 25% in Rf
Borrow at the riskless rate and invest his or her funds, plus the borrowed money in
Rf
Invest all his or her funds in the riskless asset
Borrow at the riskless rate and invest his or her funds, plus the borrowed money in
Rm
 Question 21
0 out of 1 points
Given the following information calculate the standard deviation of returns of a portfolio that combines
government bonds with the market portfolio.
Rm = .11
Rf = .05
Standard Deviation of market return = 0.11
Enter your answer as a decimal accurate to three decimal places.
Proportion invested in Rm = 0.4
 Question 22
0 out of 1 points
With respect to the graph provided above (PBEHP 12 th Ed, page 184) which of the following statements
is incorrect.
Selected
Answer: The degree of risk reduction increases as the correlation between returns on the two
securities decreases coefficient
Answers: When the correlation coefficient is -1, risk can be eliminated completely
Risk-averse investors would never hold combinations of the two securities represented
by by points on the on the dotted lines
A risk-averse investor does not like risk and so would prefer to invest in the portfolio
represented by the point where the expected return is .096 and the standard deviation is
zero, because this portfolio has zero risk
The degree of risk reduction increases as the correlation between returns on the two
securities decreases coefficient
A risk-averse investor would prefer combinations on the hard red line represented by
ρ1,2 = -1.0, as opposed to all of the other feasible combinations below this line
 Question 23
0 out of 1 points
With respect to the graph above (PBEHP, 12 Ed, page 191).
Which of the following statements is incorrect?

Selected
Answer: To reach a point on the line Rf through to N, that is above M the weight or proportion
of Rf must be negative
Answers: The portfolios represented by the points on the line through Rf and M
dominate the portfolios represented by the line Rf through T
The lowest risk portfolio is a portfolio of 100% in government bonds, at point Rf
For investors the levered (borrowing) portfolios from M up to N provide higher returns
than the portfolios from Rf to M.
The lines U1, U2, and U3 represent the utility function of three different investors, U1
represents a risk averse investor, U2 represents a risk neutral investor and U3 is a risk
seeker
To reach a point on the line Rf through to N, that is above M the weight or proportion
of Rf must be negative

Mod
Module 8
 Question 1
0 out of 0 points
Selected
Answers:
 Question 2
A security market line [SML]:
Selected
Answer: is a graphical representation of the CAPM.
Answers: explains the co-variance between the returns on the risky asset and a riskless asset.
is a graphical representation of the CAPM.
explains the co-variance between the returns on the risky asset and the market
portfolio.
gives the risk-return relationship for efficient portfolios only
is a graphical representation of the CML.
 Question 3
2 out of 2 points
Polycorp is considering a new project. The project has beta (β) that is twice that of the
firm's existing assets (projects). Polycorp's existing assets have a required return (cost
of capital) of 9%, the market risk premium is 7% and the risk free rate is 5%. Calculate
the beta for the new project. Provide your answer accurate to two decimal places.
 Question 4
1 out of 1 points
Polycorp's existing assets (projects) have a average beta of 1.2. The market risk
premium is 6% and the risk free rate is 3%. What is the risk adjusted rate of return
RADR required for these assets (the cost of capital of the existing assets)? provide your
answer as a percentage but do not enter the % sign. An answer of 10.456% should be
entered as 10.46.
 Question 5
1 out of 1 points
The CAPM predicts that an asset with a beta of zero will offer a return equal to Rf.

Answers: True
False
 Question 6
1 out of 1 points
Two assets with a beta of one should have the same covariance with the market.

Answers: True
False
 Question 7
Given the following on 5 independent projects:

Project IRR Beta RADR Accept/Reject
A 7.01% 0.2 [Ra] [Da]
B 11.90% 1 [Rb] [Db]
C 14.50% 1.2 [Rc] [Dc]
D 11.00% 0.8 [Rd] [Dd]
E 18.00% 2 [Re] [De]
Calculate the risk adjusted discount rate for each project and determine whether each project
should be accepted or rejected. Rm = 12% and Rf = 5%
Enter your answers for RADR as a percentage accurate to one decimal place and enter the %
sign as well. eg 10.1 should be entered as 10.1%
For the accept/ reject decision enter the word accept or reject in lowercase.
Do not use commas.
Do not use leading zeros.
Specified Answer for: Ra 6.4%
Specified Answer for: Da Accept
Specified Answer for: Rb 12.0%
Specified Answer for: Db Reject
Specified Answer for: Rc 13.4%
Specified Answer for: Dc Accept
Specified Answer for: Rd 10.6%
Specified Answer for: Dd Accept
Specified Answer for: Re 19.0%
Specified Answer for: De Reject
Correct Answers for: Ra
Exact Match 6.4%
Exact Match 6.40%
Exact Match .064
Exact Match 6.4
Exact Match 6.40
Correct Answers for: Da
Exact Match accept

Exact Match Accept
Correct Answers for: Rb
Exact Match 12%
Exact Match 12.0%
Exact Match 12
Exact Match .12
Exact Match 12.0
Correct Answers for: Db
Exact Match reject
Exact Match Reject
Correct Answers for: Rc
Exact Match 13.4%
Exact Match 13.4
Exact Match .134
Exact Match 13.40%
Exact Match 13.40
Correct Answers for: Dc
Exact Match accept
Exact Match Accept
Correct Answers for: Rd
Exact Match 10.6%
Exact Match 10.60%
Exact Match 10.6
Exact Match .106
Exact Match 10.60
Correct Answers for: Dd

Exact Match accept
Exact Match Accept
Correct Answers for: Re
Exact Match 19%
Exact Match 19.0%
Exact Match .19
Exact Match .190
Correct Answers for: De
Exact Match reject
Exact Match Reject
 Question 8
1 out of 1 points
What is the beta of an asset with an expected return of 16%, if the risk-free rate of interest is 6% and the
expected market portfolio risk premium is 6%? Accurate to two decimal places.
Selected Answer:
1.67
Answers: 1.5
.75
1.67
Cannot be calculated.
 Question 9
1 out of 1 points
Given the information in the table below calculate the Beta of a portfolio that combines investments A,
B, and C in the proportions given.
Investment Beta Weight

A 0.6 .3
B 1.2 .2
C 1.6 .5
Your answer should be accurate to two decimal places.

Correct Answer: 1.22
Answer range +/- 0.01 (1.21 - 1.23)
 Question 10
1 out of 1 points
Portfolio A has a covariance with Portfolio B of .09 and a covariance with the market of .06
while the standard deviation of the market is 20%. What is the expected return on Portfolio A
if the risk free rate is .04 (4%) and the expected return on the market is 12%?
Do not enter the % sign. Give your answer as a percentage with accuracy to two decimal
places, eg enter 11.00% as 11.00
Correct Answer: 16
Answer range +/- 0.05 (15.95 - 16.05)
 Question 11
1 out of 1 points
A well-diversified portfolio should have a beta significantly less than one.

Answers: True
False
 Question 12
2 out of 2 points
Refer to the diagram above from PBEHP 12th Ed, page 193.
Which of the following statements is correct. Note there may be more than one correct.
The risk-free asset has a beta of zero and the market portfolio has a beta of one
In equilibrium all financial assets will plot on the SML line and have an NPV of zero.
Positive NPV assets plot above the line and are considered to be underpriced
The expected return on risky assets consists of two components: the risk-free return plus a
premium for risk
The market risk premium in this example is 5%

Answers: Negative NPV projects plot below the line and are considered to be underpriced
The risk-free asset has a beta of zero and the market portfolio has a beta of one
In equilibrium all financial assets will plot on the SML line and have an NPV of zero.
All assets, securities and portfolios which plot on the SML are efficient.
Positive NPV assets plot above the line and are considered to be underpriced
The expected return on risky assets consists of two components: the risk-free return plus a
premium for risk
The market risk premium in this example is 5%

 Question 13
2 out of 2 points
Copy of
Refer to the diagram above from PBEHP 12th Ed, page 193.
Which of the following statements is correct. Note there may be more than one correct.
All projects plotting on the SML have an NPV of zero
If we combine asset 1 and asset 2 in equal proportions then the average beta would be one
The slope of the SML can be calculated by referring to any two points on the SML, for
example the points representing Assets 1 and 2. Slope is equal to difference in return divided
by difference in beta (.175 - .125)/(1.5 - .5).
Aproject with a beta of 1.3 requires a return greater than 16.5% in order to add value
A risk averse investor would invest only in the riskfree asset as it has no risk
Answers: If Asset 2 has an IRR greater than15% then it should be accepted (according to the SML and
the firm objective of maximising value..
All projects plotting on the SML have an NPV of zero
If we combine asset 1 and asset 2 in equal proportions then the average beta would be one
Asset 2 is a better investment than Asset 1
The slope of the SML can be calculated by referring to any two points on the SML, for
example the points representing Assets 1 and 2. Slope is equal to difference in return divided
by difference in beta (.175 - .125)/(1.5 - .5).
Aproject with a beta of 1.3 requires a return greater than 16.5% in order to add value
A risk averse investor would invest only in the riskfree asset as it has no risk
 Question 14
1 out of 1 points
The discount rate that should be used to calculate the NPV of a project depends on the business risk of
the project, not on the business risk of the firm.

Answers: True
False
 Question 15
1 out of 1 points
As a general rule firms should accept all positive NPV projects as long as they diversify risk at the same
time.

Answers: True
False
 Question 16
2 out of 2 points
The annual nominal rate is jm = 0.14pa. What is the effective annual rate as a percentage to two decimal
places? The number of compounding periods is 10. Enter your answer as a decimal eg 17.42% = .1742
to four decimal places. Accuracy of one basis point. Tip: use excel to get the required accuracy.

Module 9
 Question 1
0 out of 0 points
Selected
Answers:
 Question 2
A Limited has just issued a bond with face value of $1000 and a coupon rate of 8%. If the bond has a life
of 15 years, pays annual coupons and the YTM is 7.5%, what will the bond sell for?
Selected Answer:
$1044
Answers: $1162
$1051
$957
$1020
$1044
 Question 3
1 out of 1 points
The 90 day bank bill rate is quoted as 4.5 in the financial press. What is the correct cost of capital k bb to
be used in the WACC calculation. Express as a number accurate to four places (to the nearest basis
point). Do not enter the % sign (eg 5.5671% should be entered as .0557).
 Question 4
1 out of 1 points
What is the cost of capital for bank overdraft (kbo). The overdraft rate is 7.2 % pa compounded 12 times
a year? Answer as a percentage to two decimal places. Do not enter the % sign.
 Question 5
Calculate the weighted average cost of preference shares and ordinary shares if there are: 5 million
preference shares with market value of $2.50 each and an opportunity cost of 10.8%; 10 million ordinary
shares with market value of $4.50 each and an opportunity cost of 16.5%.
Selected Answer:
Answers: 15.4%
16.9%
16.2%
Cannot be calculated.
 Question 6
1 out of 1 points
Complete the following table by calculating the weighted average cost of capital after tax.
The firm can issue debt to the market at the current rate of 10 % pa. The tax rate is 30 %.
Funds Cost after Tax % Value in $M Weight % Weighted Cost %

Equity 15% 30 [a] [d]
Debt [x] 15 [b] [e]
Preference 9% 5 [c] [f]
Total [g]
Enter your answers as percentages including the % sign (eg 10%, 3.2%, .9% with no leading zeros,
not 0.9%, 15% should be entered as 15% not 15.0%).
Specified Answer for: a 60%
Specified Answer for: d 9%
Specified Answer for: x 7%
Specified Answer for: b 30%
Specified Answer for: e 2.1%
Specified Answer for: c 10%
Specified Answer for: f .9%
Specified Answer for: g 12%
Correct Answers for: a
Exact Match 60%
Exact Match 60.0%
Correct Answers for: d
Exact Match 9%
Exact Match 9.0%
Exact Match 9.00%
Exact Match 9
Correct Answers for: x
Exact Match 7%
Exact Match 7.0%
Exact Match 7.00%
Exact Match 7
Correct Answers for: b
Exact Match 30%

Exact Match 30
Correct Answers for: e
Exact Match 2.1%
Exact Match 2.1
Exact Match 2.10%
Correct Answers for: c
Exact Match 10%
Exact Match 10
Exact Match 10.0%
Correct Answers for: f
Exact Match .9%
Exact Match 0.9%
Exact Match .9
Exact Match 0.90%
Correct Answers for: g
Exact Match 12%
Exact Match 12
Exact Match 12.0%
 Question 7
1 out of 1 points
The next dividend for ABC Limited will be $0.5 per share (D1). Investors require a 12
% return on companies such as ABC Limited. ABC's dividend increases by 4 % every
year. Based on the dividend growth model what is the value of ABC Limited shares
today? Price to the nearest cent. Do not enter the $ sign.

 Question 8
1 out of 1 points
Calculate the cost of equity capital using CAPM if the risk-free rate of interest is 5 per
cent, the return on the market portfolio is 10 per cent, the beta of the firm's assets is .8
and the and beta of equity is 1.2. Provide your answer as a percentage to two decimal
places. Do not enter the % sign.
Selected Answer: 11
 Question 9
If a company with a rating of BBB has on issue debentures paying a coupon rate of 6% pa and the
market yield on similar BBB securities is 7% pa, what is the correct cost of debenture capital (k db),
before tax, that the company should use when estimating the WACC using the textbook WACC
formula? The riskfree rate is 5% pa.and the Rm is 13% pa.
Selected Answer:
7%
Answers: 10%
7%
13%
6%
5%
None of the other given options is correct.
 Question 10
From the following information, calculate the weighted average cost of debt (kd ), before tax. (accurate
to two decimal places).
Source Market Value ($m) Book Value ($m) Cost of Debt

(BT)
Commercial Bills 19.8 22 6.7%
(kcb)
Bank Overdraft 5 5 12.3%
(kbo)
Bonds (kb) 9.2 5.5 9.8%
Selected Answer:
8.36%
Answers: 8.09%
9.60%
8.36%
10.6%
7.2%
 Question 11
0 out of 1.5 points
Assume that A limited paid a dividend of 25.5 cents per share just recently. The shares
currently sell for $10.1. You also estimate that the dividend will grow steadily at 2.3 %
per year into the indefinite future. What is the cost of capital, ke for A limited? Answer
as a percentage accurate to two decimal places. Do not enter the % sign.

 Question 12
Calculate the cost of preference capital (kp) for a non-redeemable preference share which has the
following:
Price = $15 and a Preference dividend of $1.9 paid every six months. Your answer should the effective
annual cost as a decimal accurate to four decimal places. For example an answer of 12.113% should
be entered as .1211 with no % sign.
 Question 13
Given that preference shares have an expected dividend stream of 20 cents in perpetuity and that the
current market price (cum-dividend) of the preference shares is $2.40, calculate the cost
of capital(kp) of these preference shares.
Selected Answer:
9.09%
Answers:
9.09%
8.33%
12%
8%
10%
 Question 14
0 out of 1.5 points
XYZ Corporation has just paid a dividend of 54 cents per share. The current market price of the share is
$16 and shareholders require a return of 10 % pa. What is the annual growth rate (g) of the
dividends? Answer as a percentage accurate to two decimal places. Do not enter the % sign.
 Question 15
The cost of capital of a project:
Selected
Answer: Depends on the business risk of the project.
Answers: Depends on the characteristics of the managers of the firm.
Depends on the characteristics of the company undertaking the project.
Depends on the business risk of the project.
Depends on the correlation of the proposed project's cash flows with the cash flows
of the firm.
Depends on the characteristics of the investors.
 Question 16
1 out of 1 points
The market price of a bond is $1129 (Face Value = 1000). It has 14 years to maturity and pays an annual
coupon of $100 in semi-annual installments. What is the effective annual cost of debenture capital before
tax (kd)?
Selected Answer:
8.59%
Answers: 4.21%
5.00%
7.39%
8.59%
8.42%
10.00%
 Question 17
Under what conditions can a company's current capital structure be used to calculate the weights for each
source of funds?
Selected
Answer: When the current structure reflects the target structure.
Answers: When only book values are available.
When implementing a new project is not expected to alter a company's target capital
structure.
Only when preference shares are not included in the measure for WACC.
When implementing a new project will alter a company's capital structure.
When the current structure reflects the target structure.
When reliable market weights can be obtained.
 Question 18
Under which of the following conditions is it appropriate to estimate a project's cost of capital using the
company's cost of capital?
Selected Answer:
When a company operates in a sole industry.
Answers: When the systematic risk of a project is similar to that of some other divisions.
When a company is a diversified conglomerate.
When a company operates in more than one industry but less than five.
When the total risk of the project is the same as the total risk of the firm.
When a company operates in a sole industry.
 Question 19
When calculating the WACC retained earnings should be included as a source of

funds.
Answers: True
False
Response Retained earnings is accounted for in the market value of equity,
Feedback:
including it again would be double counting.
 Question 20
When calculating WACC trade credit (accounts payable) should not be included as a
source of funds.
Answers: True
False
Response Accounts payable is offset against current assets, and so including
Feedback:
trade credit as a source of funds would be double counting.
 Question 21
A company has annual net operating cash flow (X) of 1 million dollars in perpetuity
and the market value of its capital (V) is 10 million dollars. What is the company's
cost of capital ko? Provide your answer as a percentage to two decimal places. Do not
enter the % sign.
Selected Answer: 10
 Question 22
1 out of 1 points
Polycorp has a debt equity ratio of 0.55.What is the correct debt ratio D/V that should be used in the
WACC formula?
WACC = ke x E/V + kd x (1-t) x D/V
Provide an answer as a decimal accurate to two decimal places eg 60.156% should be entered as .60
Do not enter the % sign.

 Question 23
When is the cost of capital for a company as a whole, a valid measure of the cost of capital for an
individual project?
Selected
Answer: When the risk of the new project is the same as the risk of the firm's existing
projects.
Answers: When market data are not available.
When it is not practicable to estimate the cost of capital of individual projects.
When the risk of the new project is the same as the risk of the firm's existing
projects.
When the CAPM is used as an ex post model.
Never.
 Question 24
When using the CAPM to estimate the cost of equity for evaluation of investment proposals, the
appropriate substitute for the risk free rate of interest is:
Selected
Answer: The yield on a government security whose term to maturity matches the life of the
proposed project.
Answers: The yield on 90 day treasury notes.
The yield on three year government bonds.

The yield on a government security whose term to maturity matches the life of the
proposed project.
The yield on a 30-year government bond.
The yield on ten year government bonds.

Module 10
 Question 1
0 out of 0 points
Selected
Answers:
 Question 2
If the market processes new information efficiently, the reaction of market prices to new information
will be:
Selected Answer:
instantaneous and unbiased.
Answers: random
instantaneous.
unbiased.
fair.
instantaneous and unbiased.
 Question 3
An efficient capital market is one in which:
Selected Answer:
security prices fully reflect all available information.
Answers: no abnormal returns can be made
there are a large number of buyers and sellers.
security prices fully reflect all available information.
transaction costs are minimal.
there is no thin trading.
 Question 4
Returns greater or less than that which the market expects from a security are known as:
Selected Answer:
abnormal returns.
Answers: inferior returns.
abnormal returns.
true returns.
excess returns
normal returns.
 Question 5
Flukey Gold Mines makes an unexpected announcement regarding gold production at 2.20 p.m. Shares
of the company were traded at 12 p.m., 2.10 p.m., 2.30 p.m. and 4 p.m. If the market for Flukey Gold
Mines' shares is efficient, then at which trade will the newly established share price fully reflect the new
information?
Selected Answer:
2.30 p.m.
Answers:
2.30 p.m.
on the opening of the next trading day
4 p.m.
12 p.m.
2.10 p.m.
 Question 6
A weak-form efficient market can best be described as a market in which:
Selected
Answer: trading strategies based upon past share prices cannot consistently earn abnormal
profits.
Answers: share prices follow predictable trends.
all publicly available information is fully reflected in share prices.
trading strategies based upon past share prices cannot consistently earn abnormal
profits.
trends in prices can be exploited
trading strategies based on past information can earn abnormal profits.
 Question 7
Which of the following statements about market efficiency is true?
Selected
Answer: A market must be weak-form efficient if it is semi-strong form efficient.
Answers: A market can be semi-strong form and strong-form efficient but not weak-form
efficient.
A market must be weak-form efficient if share prices are random.
A market can be semi-strong form, weak-form or strong-form efficient but not all
simultaneously.
A market must be weak-form efficient if it is semi-strong form efficient.
A market can be semi-strong form efficient but not weak-form efficient.
 Question 8
Semi-strong form efficiency can best be described as:
Selected
Answer: a market in which trading strategies based on all publicly available information
cannot earn abnormal profits.
Answers:
a market in which trading strategies based on all publicly available information
cannot earn abnormal profits.
noone can make a profit
the ability of investors to earn abnormal profits from the over-reaction of share prices
to news.
all information, public and private, is fully impounded in share prices.
a market in which trading strategies based on past prices cannot earn abnormal
profits.
 Question 9
The random walk hypothesis assumes that:
Selected
Answer: successive price changes are independent and identically distributed over time.
Answers: capital markets are semi-strong form efficient.
successive price changes are independent and identically distributed over time.
share price changes are correlated.
the expected return on an asset is constant from one period to the next and therefore
changes in actual returns around the expected return are non-random.
capital markets are weak-form efficient.

 Question 10
Which of the following results may be inconsistent with semi-strong form market efficiency?
Selected Answer:
Share returns follow a predictable trend after a profit announcement.
Answers: Share prices react instantaneously to profit announcements.
Abnormal returns are not detected around profit announcements.
Share returns follow a predictable trend after a profit announcement.
 Question 11
If fund managers display superior investment performance, it can then be said that:
Selected Answer:
the market is not strong-form efficient.
Answers: the market is strong-form efficient.
fund managers do not use past information to derive trading strategies.
none of the given options.
the market is not strong-form efficient.
 Question 12
The January effect refers to:
Selected Answer:
the fact that the average share return for January is larger than in any other month.
Answers: mis-pricing of shares due to New Year parties.

the fact that the average share return for January is larger than in any other month.
the fact that smaller firms, on average, earn higher returns than larger firms.
the fact that the average share return for January is smaller than any other month.
the mispricing of shares due to brokers being on holidays for most of January
 Question 13
The size effect refers to:
Selected
Answer: the observation that returns on shares of smaller companies are larger than those of
larger companies.
Answers: the observation that returns on shares of smaller companies are smaller than those of
larger companies.
the observation that returns on shares traded exclusively on small markets are below
average.
the observation that returns on shares traded exclusively on large markets are above
average.
the observation that returns on shares of smaller companies are larger than those of
larger companies.
the observation that returns on shares of smaller companies are no different from
those of larger companies
 Question 14
If the stock market is efficient with respect to the incorporation of publicly available information, then:
Selected Answer:
fundamental analysis is unlikely to be profitable.
Answers: insider information is unlikely to lead to abnormal profits.
fundamental analysis is unlikely to be profitable.
charting a company's share prices is likely to be profitable.

fraudulent activity is not possible.
technical analysis is likely to be profitable.
 Question 15
Which of the following statements is the most consistent with evidence provided on the EMH?
Selected Answer:
Most investors should adopt a passive buy-and-hold strategy, most of the time.
Answers: Technical analysis is a worthwhile trading strategy for most investors.
Most investors have access to private information.
Fundamental analysis is a worthwhile trading strategy for most investors.
Investors cannot make abnormal returns.
Most investors should adopt a passive buy-and-hold strategy, most of the time.
 Question 16
________ assets on average earn a risk premium.
Selected Answer:
Risky
Answers: Most
Real
Risky
Financial
None of the given answers
 Question 17
The hypothesis that market prices reflect all historical information is called efficiency in the:
Selected Answer:
weak form
Answers: open form
weak form
strong form
semi-strong form
 Question 18
The hypothesis that market prices reflect all publicly available information is called efficiency in the:
Selected Answer:
semi-strong form
Answers: weak form
strong form
semi-strong form
open form
 Question 19
The hypothesis that market prices reflect all available information is called efficiency in the:
Selected Answer:
strong form
Answers: open form
strong form
weak form
semi-strong form
 Question 20
The excess return required from an investment in a risky asset over a risk-free investment is called:
Selected Answer:
a risk premium
Answers: a return premium
only a return premium and a risk premium
an average return
a real return
a risk premium
 Question 21
According to Liquidity Preference Theory long-term government bonds have a risk premium above
short-term rates because:
Selected
Answer: of longer time to maturity
Answers: the government cannot easily raise tax dollars to repay the bonds
of longer time to maturity
long-term government bonds do not have risk premium
they are not guaranteed by the government
both long-term government bonds do not have risk premium and they are not
guaranteed by the government

 Question 22
In an efficient market the current price is:
Selected Answer:
neither too low nor too high
Answers: always higher
neither too low nor too high
always lower
the prices do not change
 Question 23
If all private information is reflected in security prices, then:
Selected Answer:
markets are strong form efficient
Answers: none of the given answers
markets are strong form efficient
markets are semi-strong form but not strong form efficient
markets are weak and semi-strong form efficient but not strong form efficient
markets are semi-strong form efficient
 Question 24
Risk premium is defined as:
Selected Answer:
expected return - risk free rate
Answers: expected return + risk free rate

returns/probabilities
expected return - risk free rate
expected return/risk free rate
 Question 25
Risk that affects a large number of assets each to a greater or lesser degree is called:
Selected Answer:
systematic risk
Answers: idiosyncratic risk
systematic risk
micro risk
unsystematic risk
total risk
 Question 26
Risk that affects at most a small number of assets is called:
Selected Answer:
unsystematic risk
Answers: market risk
portfolio risk
undiversifiable risk
unsystematic risk
total risk
 Question 27
Unsystematic risk is also known as:
Selected Answer:
unique risk
Answers:
unique risk
macro risk
both systemic risk and unique risk
systemic risk
market risk
 Question 28
Total risk is defined as:
Selected Answer:
both market risk + unique risk and systematic + unsystematic risk
Answers: standard deviation + variance
market risk + unique risk
both market risk + unique risk and systematic + unsystematic risk
systematic risk - unsystematic risk
systematic + unsystematic risk
 Question 29
Spreading an investment across many assets will eliminate:

Selected Answer:
unsystematic risk
Answers:
unsystematic risk
market risk
systematic risk
both systematic risk and market risk
 Question 30
Non-systematic risk is also called:
Selected Answer:
all of the given answers
Answers: diversifiable risk
asset-specific risk
all of the given answers
unique risk
 Question 31
The expected return on an asset depends only on that asset's:
Selected Answer:
systematic risk
Answers:
systematic risk
unsystematic risk
unique risk
total risk
 Question 32
The difference between the expected return on a market portfolio and the risk-free rate is known as:
Selected Answer:
market risk premium
Answers: reward to risk premium: total return premium
risk free premium
market risk premium
market return
 Question 33
Assets with larger betas have:
Selected Answer:
greater systematic risk
Answers: both higher systematic risk and higher unsystematic risk
both higher systematic risk and lower total risk and greater systematic risk
higher systematic risk and lower total risk
greater systematic risk
lower systematic risk and higher total risk
 Question 34
The CAPM shows that the expected return for an asset depends on three things:
I. the risk-free rate of return
II. the reward for bearing idiosyncratic risk
III. the amount of systematic risk
IV. the reward for bearing systematic risk
V. the reward for bearing unique risk
Selected Answer:
I, IV and III
Answers:
I, IV and III
II, III and IV
III, IV and V
I, III and V
II, IV and V
 Question 35
The connection between term and interest rates is called:

Selected Answer: c.
term structure of interest rates.
Answers: a.
interest rate risk.
b.
price risk.
c.
term structure of interest rates.
d.
default structure of interest rates.
 Question 36
In general, an upward-sloping term structure implies that investors expect future short-
term interest rates to:
Selected Answer: d.
increase.
Answers: a.
increase by a minimum of 5bp.
b.
be the same as the current rate.
c.
decrease.
d.
increase.
 Question 37
In general, a downward-sloping term structure implies that investors expect future short-term interest
rates to:
Selected Answer:
decrease.
Answers: increase.
none of the given options.
decrease.
 Question 38
A flat term structure implies that investors expect future short-term interest rates to:
Selected Answer:
Answers: decrease.
increase.
none of the given options
 Question 39
The expectations theory of the term structure of interest implies:
Selected
Answer: that investors can expect to achieve the same return over any future period, regardless
of the security in which they invest.
Answers: that interest received on securities is in accordance with term to maturity.
there is a premium due to uncertainty about the future level of interest rates.
there is a risk that borrowers may default on the payment of the principal.
that investors can expect to achieve the same return over any future period, regardless
of the security in which they invest.
 Question 40
Liquidity premium theory suggests that:
Selected
Answer: there is a premium on longer maturities versus shorter maturities due to increasing
uncertainty about the future level of interest rates as maturity increases..
Answers: the market for some securities may be thinly traded; hence, investors require a reward
for this risk.
there is a downward bias in the yield curve.
there is an upward bias in the yield curve because interest rate risk decreases with term
to maturity.
there is a premium on longer maturities versus shorter maturities due to increasing

uncertainty about the future level of interest rates as maturity increases..
 Question 41
0 out of 0.5 points
The following one-year "forward" rates exist for each of the years 2012-2016:
1/1/12 - 31/12/12 20.00%

1/1/13 - 31/12/13 25.00%
1/1/14 - 31/12/14 20.00%
1/1/15 - 31/12/15 20.00%
1/1/16 - 31/12/16 11.11%
Calculate the 1, 2, 3, 4, and 5 year spot rates as at 1/1/12. Accuracy to two decimal places is required.
Selected
Answer: 1-year rate = 20% 2-year rate = 22.50% 3-year rate = 21.67% 4-year rate =
21.25% 5-year rate = 19.22%
Answers: 1-year rate = 20% 2-year rate = 22.50% 3-year rate = 21.67% 4-year rate =
21.25% 5-year rate = 19.22%
1-year rate = 20% 2-year rate = 25% 3-year rate = 20% 4-year rate = 20% 5-year
rate = 11.11%
Cannot be calculated as more information is required.
1-year rate = 20% 2-year rate = 22.47% 3-year rate = 21.64% 4-year rate =
21.23% 5-year rate = 19.14%

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Module 2

 I DECLINE and will contact the course coordinator by email immediately.

Selected Answer: 2,772

Correct Answer: 2,772 ± 2

Selected Answer: 2,509

Correct Answer: 2,509 ± 2

Correct Answer: 4,799 ± 2

Selected Answer: 14,207

Correct Answer: 14,207 ± 2

Correct Answer: 50,000 ± 10

Selected Answer: 0.1607

Correct Answer: 0.1607 ± 0

Correct Answer: 5,714 ± 5

Response Feedback: Use the constant growth formula. P = D1/(r-g)

The two annuities will differ in present value by a factor of (1+r).

Response Feedback: correct

Interest earned on the reinvestment of previous interest payments is known as:

Response Feedback: incorrect

The expression (1+r)t is also called the:

Answers: present value interest factor

future value interest factor

interest rate formula

present value formula

PV0 = 1000 x PVIFA(.1,5) x (1.1)-3

PV0 = 1000 x PVIFA(.1,5)

PV0 = 1000 x PVIFA(.1,5) ÷ (1.1)4

PV0 = 1000 x PVIFA(.1,5) x (1.1)-4

A commission of 30% of sales. Yearly commissions are expected to be,

$100,000 today plus an annual salary of $25,000. The first annual

Annual salary of $56,700 with payments commencing in one year and

Selected Answer: False

 I DECLINE and will contact the course coordinator by email immediately.

Selected Answer: 71.43

Correct Answer: 71.43 ± 0.02

Selected Answer: 1.98

Correct Answer: 1.98 ± 0.02

Polycorp is about to issue debentures. The following information is available.

Selected Answer: 105.35

Correct Answer: 105.35 ± 0.05

Correct Answer: 17.80 ± 0.02

Correct Answer: 1,961,311 ± 3

Correct Answer: 2,834 ± 2

Selected Answer: 9.00

There is an inverse relationship between interest rates (yields) and:

Answers: face value

both coupon and face value

Which of the following statements is incorrect?

The constant growth formula breaks down when ke < g.

Face value = $100

Correct Answer: 92.41 ± 0.02

Response Feedback: correct

Response Feedback: correct

cannot be determined not enough information

A friend of QUT wishes to establish a trust to pay a perpetual scholarship in the

 I DECLINE and will contact the course coordinator by email immediately.

None of the other given options is correct.

Selected Answer: 203,132

Correct Answer: 211,614 ± 5

NPV = -Outlay +CF[1-(1+r) -t]/r + SV/(1+r) t

CF is the annual net cash flow

Answer in years accurate to two decimal places.

Selected Answer: 3.25

Correct Answer: 3.25 ± 0.01