1.It could be argued that the best mix of Debt and Equity is the one which
Sol: Minimizes the WACC.
2.Which of the methods listed below would be the least appropriate for
evaluating mutually exclusive projects?
Sol: The Rate of Return method.
3.One of the factors resulting in a lower WACC is
Sol: The tax saving resulting from the interest expense on company debt being tax
deductible.
4.Increasing the ratio of debt to equity will result in
Sol: The company’s equity becoming more risky.
5.Which of the below is a potential problem when using the Rate of Return
method to evaluate project cash flows?
Sol: The Rate of Return calculation makes the assumption that the cash flows
received during the life of the project are re-invested at the project’s computed
Rate of Return.
6.A project’s Rate of Return is_______ than the MARR if and only if _________.
Sol: greater; its Present Worth is greater than zero.
7.Grand River Plus Inc. is evaluating a possible investment in a new passenger
river boat, in order to expand its offerings of river tours. Analysis of the
projected cash flows revealed the following information: Annual Worth of
$16,000; Rate of Return of 18%; MARR of 15%. The proposal should be
Sol: Accepted because the Rate of Return is greater than the MARR.
8.Rate of Return is the interest rate that
Sol: Makes the Preset Worth equal to zero.
9.When referring to the stream of cash flows given in the table below, the cash
flows would be best described as
| Year | Cash Flow |
| 0 | ($20,000) |
| 1 | $4,000 |
| 2 | $4,500 |
| 3 | $5,000 |
| 4 | $2,500 |
A) Conventional.
10.For a 60–40 D-E mix of investment capital, the maximum cost for debt capital
that would yield a WACC of 10% when the cost of equity capital is 4% is closest
to
A) 14%
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