Capital Budgeting Paper 18

1

A company has prepared a net present value analysis of a possible capital budgeting project involving the adoption of a new production process; the company is now addressing risk. There will likely be some variance from the estimates used in the analysis as actual results are experienced through the life of the project. Which one of the following estimates is most likely to vary significantly from estimate?






2

A treasurer is in the process of determining whether she should invest a portion of her company’s pension plan assets in publicly traded Trip Auto Company. The treasurer has collected the following information on Trip Auto Company:
? Current-year dividend = $1.50
? Yearly dividend increase = 5%
? Expected investor return = 10%
? Current share price = $25.00
On the basis of the information provided above, the treasurer is justified in concluding that an investment in Trip Auto






3

A company received a legal settlement of $1 million. The company could apply this $1 million toward its mortgage on the building it owns and save 4% in interest. The CFO suggested that based on historical analysis of the market over time, it was likely the company could earn around 8% over the term of the mortgage if it invested the money, which was a better return than the 4%. The business owners elected to apply the money to the mortgage rather than invest the money. Based on the decision described in this scenario, a reasonable conclusion would be that the company has a






4

According to market segmentation theory long-term interest rates are determined primarily by






5

Questo borrowed $100,000 from a bank on a one-year 8% term loan, with interest compounded quarterly. What is the effective annual interest on the loan?






6

Short-term interest rates are






7

According to the expectations theory, if the yield curve on the New York money market is upward sloping while that on the Tokyo money market is downward sloping, then inflation in






8

According to the expectations theory of the term structure of interest rates, if inflation is expected to increase, the yield curve is






9

A curve on a graph with the rate of return on the vertical axis and time on the horizontal axis depicts






10

The return paid for the use of borrowed capital is referred to as






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