1) The IRS is reevaluating the asset life categories used for ACRS depreciation. The trucks that JK Industries use are currently classified by the IRS as having an asset life of 7 years. Because these trucks actually last for 10 years, the firm's managers would prefer the IRS to reclassify them as 10-year assets so the firm can keep them longer, spread the cost of depreciation over more years and hence increase earnings. (True, False, Uncertain and explain your response)
2) Obsolete Computer Systems, Inc. wants to reemerge as a major producer of computer software. The company has two options: Either it can purchase Upstart Software for $25m now whose products are expected to survive 5 years. Or it can develop an ongoing new line of software via research and development expected to cost $5m per year with implementation costs of $25m in 4 years. Using reasonable cash flow estimates from each product line, the Obsolete CFO has estimated that the internal rate of return from purchasing Upstart Software is 15% and the IRR of in-house R&D is 14%. As a member of Obsolete's board of directors (and an ERAU alum who knows how misleading IRR analysis can be...hint), you should vote against the CFO's recommendation to purchase Upstart Software. (True, False, Uncertain and explain your response)
3) Managers' desire for job security and firm growth conflict with maximizing value for shareholders. (True, False, Uncertain and explain your response)
4) Assume that all you have available are data for the following ratios and your firm and your industry.If you want evaluate the effectiveness of your company's operating managers and you can only use one of the measures, which one should it be and why?
5) CAPM implies that the only two assets that matter to every investor in corporate stocks and bonds are the risk-free Treasury Bill and the market portfolio of world-wide wealth. (True, False, Uncertain and explain your response)
6) Rau Inc. has 6.0 percent coupon bonds on the market with 9 years to maturity. The bonds make semi-annual payments and currently sell for 110 percent of par. What is the YTM?