Investment Risk and Portfolio Management MCQs Paper

If other factors remain constant, for an investment grade corporate bond, the higher its liquidity, the:

higher its coupon rate.
longer its duration.
lower its default risk.
lower its yield to maturity.Detailed Answer

The Keego Company is planning a $200,000 investment that has an estimated 5-year life and no salvage value. The company has projected the following cash flows for the investment:

Year Projected Cash Inflows Present Value of $1

1 $120,000 .91

2 60,000 .76

3 40,000 .63

4 40,000 .53

5 40,000 .44

The net present value of the investment is:

Year	Projected Cash Inflows	Present Value of $1
1	$120,000	.91
2	60,000	.76
3	40,000	.63
4	40,000	.53
5	40,000	.44

$18,800Detailed Answer
$218,800
$196,200
$91,743

McLean is considering the purchase of a new machine that will cost $160,000. The machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base will depreciate in the first year, 40% in the second year and 30% in the third year. The new machine will have a $10,000 resale value, which is equal to residual value at the end of its useful life. The machine is expected to save the company $85,000 in operating expenses each year. McLean uses a 40% estimated tax rate and a 16% hurdle rate to evaluate capital projects.
The discount rates for 16% are as follows:

PV of $1 PV of a $1 Annuity

Year 1 .862 .862

Year 2 .743 1.605

Year 3 .641 2.246

What is the net present value of this project?

	PV of $1	PV of a $1 Annuity
Year 1	.862	.862
Year 2	.743	1.605
Year 3	.641	2.246

	Year 0	Year 1	Year 2	Year 3
Initial Investment	(160,000)
Depreciation		48,000	64,000	48,000
Depreciation Tax Shield (Depr. Ã— 0.40)		19,200	25,600	19,200
After-tax cash from disposition ($10,000 Ã— 0.60)				6,000
Operating cash flows before tax		85,000	85,000	85,000
Tax on operating cash flow at 40%		(34,000)	(34,000)	(34,000)
Net after-tax cash flow		70,200	76,600	76,200
Discount factor @ 16%		0862	0.743	0.641
Discounted Cash Flow	(160,000)	60,512	56,914	48,844

$3,278
$6,270Detailed Answer
$5,842
$30,910

If an investment project has a negative net present value (NPV), which one of the following statements about the internal rate of return (IRRT) of this project must be true?

The IRR is negative.
The IRR is less than the companyâ€™s weighted average cost of capital.Detailed Answer
The IRR is equal to zero.
The IRR is greater than the companyâ€™s weighted average cost of capital.

Holding gains and losses on trading securities are included in earnings because:

They measure the success or failure of taking advantage of short-term price changes.Detailed Answer
The IRS mandates the inclusion.
The SEC mandates the inclusion.
They measure the book value of the securities in the balance sheet date

Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckmanâ€™s investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at:

$20,000. Detailed Answer
$18,000.
either $18,000 or $20,000, as either are defensible valuations.
$19,000, the midpoint of Dyckmanâ€™s range of reasonably likely valuations of Thomas

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Investment Risk and Portfolio Management Paper 11

If other factors remain constant, for an investment grade corporate bond, the higher its liquidity, the:

If an investment project has a negative net present value (NPV), which one of the following statements about the internal rate of return (IRRT) of this project must be true?

Holding gains and losses on trading securities are included in earnings because:

Result