Recent surveys of the CFOs of large U.S. companies rank the popularity of major capital budgeting methods in which order

Recent surveys of the CFOs of large U.S. companies rank the popularity of major capital budgeting methods in which order?

A) IRR, NPV, Payback, Discounted Payback, Profitability Index

B) Payback, Discounted Payback, Profitability Index, IRR, NPV

C) NPV, IRR, Profitability Index, Discounted Payback, Payback

D)  NPV, IRR, Payback, Discounted Payback, Profitability Index

Which of the following best explains the continuing popularity of the payback method?

A) Mathematical simplicity and some insight into the riskiness of cash flows.

B) Uses all cash flows and takes into account the time value of money.

C) Reliably selects the projects that add most value to the firm.

D) It provides objective selection criteria and is taught as the primary method in most business schools.

With respect to the capital budgeting practices of large U. S. corporations

A) the profitability index has been gaining in popularity.

B) IRR and NPV have been gaining in popularity.

C) payback and discounted payback have been gaining in popularity.

D) IRR and NPV have declined in popularity.

Which of the following techniques will always produce a single rate of return estimate?

A) IRR

B) MIRR

C) PI

D) Discounted payback

Which of the following techniques might be useful in situations where the economic life of a project is highly uncertain?

A) IRR

B) MIRR

C) PI

D) Discounted payback

Which of the following techniques might be useful in situations where mutually exclusive projects have unequal lives?

A) IRR

B) Equivalent annual cost (EAC).

C) PI

D) Discounted payback

When various capital budgeting techniques rank mutually exclusive projects differently, which of the following is theoretically most reliable?

A) IRR

B) Equivalent annual cost (EAC).

C) NPV

D) Discounted payback

Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk.

Answer:  FALSE

Currently, most firms use NPV and IRR as their primary capital-budgeting technique.

Answer:  TRUE

Most firms use the payback period as a secondary capital-budgeting technique, which in a sense allows them to control for risk.

Answer:  TRUE

Although discounted cash flow decision techniques have become widely accepted, their use depends to some degree on the size of the project and where within the firm the decision is being made.

Answer:  TRUE

Briefly describe the actual capital budgeting methods of large U.S. corporations.

Answer:  According to recent surveys of CFOs, the most common methods are IRR and NPV used by more than 70% of large corporations. The payback method remains popular and is used as a primary or secondary method by almost 60% of those surveyed, perhaps because of its simplicity and for a quick calculation of risk.

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return?

A) 35.00%

B) 12.50%

C) 17.50%

D) 25.00%

You have invested in a project that has the following payoff schedule:

                                         Probability of

              Payoff                 Occurrence

                $40                             .15

                $50                             .20

                $60                             .30

                $70                             .30

                $80                             .05

What is the expected value of the investment's payoff? (Round to the nearest $1.)

A) $60

B) $65

C) $58

D) $70

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

You are considering investing in a project with the following possible outcomes:

                                                   Probability of        Investment

        States                                  Occurrence             Returns

State 1: Economic boom              15%                        16%

State 2: Economic growth           45%                        12%

State 3: Economic decline           25%                         5%

State 4: Depression                       15%                        -5%

Calculate the expected rate of return for this investment.

A) 9.8%

B) 7.0%

C) 8.3%

D) 6.3%

Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years.

Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years. What annual rate of interest will you be paying?

Answer:  FVIF[? %, 5 yr] $3,000 = $5,775

FVIF[? %, 5 yr] = $1.925

i = 14%

 Briefly discuss how non-annual compounding (more than one compounding period per year) is preferable to annual compounding if you are an investor.

Answer:  Non-annual compounding is preferable to annual compounding because with non-annual compounding, interest is compounded more frequently within a year period. This means that more interest on interest would be generated on a given investment.

If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

Answer:  FV[10] = $1,000(12.006) = $12,006

Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980. What was the compound annual growth rate in earnings-per-share over the period?

Answer:  $12.68 = $7.99 FVIF[? %, 6 yr]

1.587 = FVIF[? %, 6 yr]

        g = 8%

If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return have you earned?

Answer:  $6,185 = $450 FVIF[? %, 20 yr]

13.743 = FVIF[? %, 20 yr]

i = 14%

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?

a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices


Answer: Liquidation preferences

The rate of return on common stock equity is calculated by dividing 

a. net income less preferred dividends by average common stockholders' equity.
b. net income by average common stockholders' equity.
c. net income less preferred dividends by ending common stockholders' equity.
d. net income by ending common stockholders' equity.


Answer: net income less preferred dividends by average common stockholders' equity

What effect does the issuance of a 2-for-1 stock split have on each of the following?

Par Value per Share Retained Earnings


a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease


Answer: Decrease No effect