MGF 301 Exam 2
TEST 2
MGF 301 Corporation Finance
Fall 2013 Please sign name in box (Note: Total Points = 100; Multiple Choice = 4 points each unless otherwise indicated)
1. YT Inc. is considering implementing a new project. Which of the following is a cash flow that should be taken into account for capital budgeting purposes?
(a) Expected lost sales in a related YT Inc. product caused by the new product (b) The annual bonus paid to the YT Inc. President based on last year's earnings
(c) Development costs for the project that the company has paid over the last two years (d) None of the above should be taken into account
2. Anthony has earned actual returns of -4% in 2010, -12% in 2011 and -3% in 2012 on an investment he made three years ago. If the risk-free rate has been 1% over the last three years, what is a good estimate of the annual E(r) Anthony expected at the beginning of 2010? Explain. (6 points)
As there were losses in three straight years, this investment definitely has some risk to it. So it must have an E(r) that is greater than the risk-free rate because no one would enter a risky investment if the E(r ) was negative or less than what they could earn guaranteed with no risk (which is the risk-free rate). As for whether the E(r ) is 5% or 15%, there is no way to tell from the data, but it should be significantly above Rf. 3. If markets follow the semi-strong form of efficient market theory, which is true? (a) market prices should quickly reflect all private information (b) stock prices will only increase when there is news that is publicly announced (c) if stock prices over-react to the announcement of information, there is no violation of the theory as long as the price returns to its initial level (d) all of the above are true
Note: none of the answers is true here which is not one of the choices
4. Mark each statement about capital budgeting as true or false. (2 points each)
a.__F_The
MGF 301 Corporation Finance
Fall 2013 Please sign name in box (Note: Total Points = 100; Multiple Choice = 4 points each unless otherwise indicated)
1. YT Inc. is considering implementing a new project. Which of the following is a cash flow that should be taken into account for capital budgeting purposes?
(a) Expected lost sales in a related YT Inc. product caused by the new product (b) The annual bonus paid to the YT Inc. President based on last year's earnings
(c) Development costs for the project that the company has paid over the last two years (d) None of the above should be taken into account
2. Anthony has earned actual returns of -4% in 2010, -12% in 2011 and -3% in 2012 on an investment he made three years ago. If the risk-free rate has been 1% over the last three years, what is a good estimate of the annual E(r) Anthony expected at the beginning of 2010? Explain. (6 points)
As there were losses in three straight years, this investment definitely has some risk to it. So it must have an E(r) that is greater than the risk-free rate because no one would enter a risky investment if the E(r ) was negative or less than what they could earn guaranteed with no risk (which is the risk-free rate). As for whether the E(r ) is 5% or 15%, there is no way to tell from the data, but it should be significantly above Rf. 3. If markets follow the semi-strong form of efficient market theory, which is true? (a) market prices should quickly reflect all private information (b) stock prices will only increase when there is news that is publicly announced (c) if stock prices over-react to the announcement of information, there is no violation of the theory as long as the price returns to its initial level (d) all of the above are true
Note: none of the answers is true here which is not one of the choices
4. Mark each statement about capital budgeting as true or false. (2 points each)
a.__F_The