Capital Budgeting Projects

Part 1 Multiple Choice: Please circle your choice in the list of possible answers. (1 point each)

1. Agency problem means the conflict between ________

   1. bond holders and shareholders.

   2. managers and suppliers.

   3. shareholders and management.

   4. controllers and treasurers.

2. Which of the following is TRUE: _______

   1. Effective monthly rate is equal to the effective annual rate divided by twelve.

   2. Compounding will not typically lead to differences between quoted and effective rates.

   3. The interest rate per period is the APR divided by the number of compounding periods per year.

   4. The APR on a loan requiring monthly payments is the annual interest rate you actually pay.

3. Firestone Co. just paid a dividend of $1.50 per share and its earnings per share is $9.00. Its book value of equity on per share basis is $36. Calculate Firestone’s growth rate:

   1. 4.17%

   2. 5.25%

   3. 20.83%

   4. 25%

4. Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Limbaugh Corp. bonds, which have a maturity of 10 years, sell at a premium and are viewed by investors as having the same risk as the Liddy bonds. Therefore, it must be true that:

   1. The coupon rate on the Limbaugh bonds is equal to that on the Liddy bonds.

   2. The coupon rate on the Limbaugh bonds is higher than that on the Liddy bonds.

   3. The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds.

   4. The yield on Limbaugh bonds is higher than the yield on Liddy bonds.

5. The internal rate of return (IRR) and the profitability index (PI) should not be used to evaluate capital budgeting projects because:

1. 1. 1. Neither method considers all cash flows.

      2. Both methods fail to take into account scale of projects.

      3. Under certain circumstances, there may be multiple IRRs and PIs.

      4. Both methods ignore the time value of money