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Free CMA Exam Braindumps (page: 18)

Page 18 of 336
PDF with 1336 Questions
View Related Case Study

The net present value method of capital budgeting assumes that cash flows are reinvested at

  1. The risk-free rate.
  2. The cost of debt.
  3. The rate of return of the project.
  4. The discount rate used in the analysis.

Answer(s): D

Explanation:

The NPV method assumes that periodic cash inflows earned over the life of an investment are reinvested at the company's cost of capital (i.e., the discount rate used in the analysis). This is contrary to the assumption under the internal rate of return method, which assumes that cash inflows are reinvested at the internal rate of return. As a result of this difference, the two methods will occasionally give different rankings of investment alternatives.



View Related Case Study

The net present value of a proposed investment is negative; therefore, the discount rate used must be

  1. Greater than the project's internal rate of return.
  2. Less than the project's internal rate of return.
  3. Greater than the firm's cost of equity.
  4. Less than the risk-free rate.

Answer(s): A

Explanation:

The higher the discount rate, the lower the NPV). The IRR is the discount rate at which the NPV is zero. Consequently, if the NPV is negative1 the discount rate used must exceed the IRR.



View Related Case Study

Dr. G invested $10.000 in a lifetime annuity for his granddaughter Emily. The annuity is expected to yield $400 annually forever. What is the anticipated internal rate of return for the annuity?

  1. Cannot be determined without additional information.
  2. 4.0%
  3. 2.5%
  4. 8.0%

Answer(s): B

Explanation:

The correct answer is 4.0%. $i0000 = $400 ÷IRP; IRR =0040 = 4.0



View Related Case Study

Comp techs is an all-equity firm that is analyzing a potential mass communications project which will require an initial after-tax cash outlay of $100,000, and will produce after-tax cash inflows of $12,000 per year for 10 years. In addition, this project will have an after-tax salvage value of $20,000 at the end of Year 10. If the risk-free rate is 5 percent, the return on an average stock is 10 percent, and the s of this project is 1.80, then what is the project's NPV?

  1. $(14544)
  2. $4,944
  3. $(37,408)
  4. $(32,008)

Answer(s): D

Explanation:

The cost of capital must be determined in order to calculate NPV.Using the Capital Asset Pricing Model to determine the cost of capital where P equals the required rate of return on equally capital, PF equals the risk-free rate, PM equals the market return, and p equals the p coefficient, then



Page 18 of 336



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