Question: Which of the following are fixed-income obligations that trade in the secondary market?
Select an Answer: certificates of deposit corporate bonds real estate investment trust common stock
Rationale:
Only corporate bonds are fixed-income obligations that trade in the secondary market, which means that one can buy and sell them to other individuals or institutions. Common stock and REITs are not fixed-income obligations, and CDs do not trade in the secondary market.
2026-06-09
Question: Business risk is concerned with the operations of the firm.
Which of the following is not associated with (or not a part of) business risk?
Select an Answer: the extent to which operating costs are fixed demand variability sales price variability changes in required returns due to financing decisions the ability to change prices as costs change
Rationale:
Business risk is the combination of sales risk and operating risk. Product demand, sales price, and operating costs are all part of sales and operating risk.
Changes in required returns due to financing decisions would be part of financial risk.
2026-06-08
Question: Project A has an internal rate of return of 18 percent, while Project B has an internal rate of return of 16 percent. However, if the company's cost of capital (WACC) is 12 percent, Project B has a higher net present value.
Which of the following statements is most correct?
Select an Answer: The crossover rate for the two project is less than 12 percent. Assuming the two projects have the same scale, Project A probably has a faster payback than Project B. All of these answers. Assuming the timing of the two projects is the same, Project A is probably of larger scale than Project B.
Rationale:
Draw out the NPV profiles of these two projects. As B's NPV declines more rapidly with an increase in discount rates, this implies that more of the cash flows are coming later on. Therefore, Project A has a faster payback than Project B.
2026-06-07
Question: Normal projects C and D are mutually exclusive. Project C has a higher net present value if the WACC is less than 12 percent, whereas Project D has a higher net present value if the WACC exceeds 12 percent.
Which of the following statements is most correct?
Select an Answer: None of the statements are correct. Project D has a higher internal rate of return. Project D is probably larger in scale than Project C. Project C probably has a faster payback.
Rationale:
In this situation, D has a flatter NPV profile and a higher IRR. Project acceptance depends on what is the correct discount rate. If the discount rate is less than 12%, accept C. If it is greater than 12%, accept D. Projects that return their cash flows early (faster payback) and have lower initial investments tend to have higher IRRs.
2026-06-06
Question: McCarver Inc. is considering the following mutually exclusive projects:
Project A
Project B
Time
Cash Flows
0
-$5,000
-$5,000
1
200
3,000
2
800
3,000
3
3,000
800
4
5,000
200
At what cost of capital will the net present value of the two projects be the same?
Select an Answer: 16.15% 15.68% 17.72% 17.80%
16.25%
Rationale:
Find the differences between the two projects' respective cash flows as follows:
