5/2/22, 2:26 PM FM Quiz 2

FM Quiz 2 Total points 10/10

The Quiz needs to be submitted well before 12.15 PM

The respondent's email (ipmx14008@iiml.ac.in) was recorded on submission of this form.

A company wants to find the cost of equity for its firm at the new level of 1/1
debt. The company's current debt-to-equity is 37%, while its target debt-to-
equity is 25%. The current beta is 1.2 . The risk free rate is 7% and the equity
market premium is 5.5%. What is the cost of equity at the target debt to
equity ratio

13.2%

20.2%

13%

12.5%

Pickles Corp. is a company which sells bottled iced tea. The company is 1/1
thinking about expanding its operations into the bottled lemonade business.
Which of the following factors should the company incorporate into its capital
budgeting decision as it decides whether or not to enter the lemonade
business?

If the company enters the lemonade business, its iced tea sales are expected to fall 5
percent as some consumers switch from iced tea to lemonade

Two years ago the company spent $3 million to renovate a building for a proposed
project which was never undertaken. If the project is adopted, the plan is to have the
lemonade produced in this building

If the company doesn’t produce lemonade, it can lease the building to another
company and receive after-tax cash flows of $500,000 a year.

First statement and the third statement are both true

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5/2/22, 2:26 PM FM Quiz 2

Full Name *

Arun Sharma

Market risk is also called: I) systematic risk; II) undiversifiable risk; III) firm- 1/1
specific risk.

I Only

II Only

II and III are synonyms

I and II are synomyms

Costs incurred as a result of past, irrevocable decisions and irrelevant to 1/1

future decisions are called:

opportunity costs.

sunk costs.

incremental costs.

marginal costs

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5/2/22, 2:26 PM FM Quiz 2

Stock A has an expected return of 10% per year and stock B has an expected 1/1
return of 20%. If 40% of a portfolio's funds are invested in stock A, and the
rest in stock B, what is the expected return on the portfolio of stock A and
stock B?

10%

20%

16%

26%

Which portfolio had the highest standard deviation during the period 1/1
between 1900 and 2011?

Common Stocks

Government Bonds

Treasury Securities

None of the above

Proper treatment of inflation in NPV calculations involves:I) discounting 1/1

nominal cash flows by the nominal discount rate;II) discounting real cash flows
by the real discount rate;III) discounting nominal cash flows by the real
discount rate

I Only

II Only

I and II Only

I and III Only

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5/2/22, 2:26 PM FM Quiz 2

If the average annual rate of return for all common stocks is 13.7%, and 6.0% 1/1
for Indian Treasury bills, what is the average market risk premium?

19.7%

7.7%

13.7%

6%

The current market value of a previously purchased machine proposed for use1/1
in a project is an example of a:

sunk cost

opportunity cost

fixed cost.

inventory cost

Which of the following statements is correct? 1/1

In a capital budgeting analysis where part of the funds used to finance the project are
raised as debt, failure to include interest expense as a cost in the cash flow statement
when determining the project's cash flows will lead to an upward bias in the NPV

The preceding statement would be true if "upward" were replaced with "downward."

The existence of "externalities" reduces the NPV to a level below the value that would
exist in the absence of externalities.

If one of the assets that would be used by a potential project is already owned by the
firm, and if that asset could be leased to another firm if the project is not undertaken,
then the net rent that could be obtained should be charged as a cost to the project
under consideration.

This form was created inside of IIM Lucknow.

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5/2/22, 2:26 PM FM Quiz 2

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