SOLVED

31) Approximately 20,000 businesses use 350,000 cases of a particular kind of metal fastener. An average case sells for $15. If Flex Bolt Ltd. sells 200,000 cases to 8,000 businesses, what is Flex Bolt’s market share? A) 10 turns B) 57% C) 40% D) 25 turns E) $3,000,000 32) What does the expected value-standard deviation rule fail to provide? A) The size of the return on investment. B) The risk associated with undertaking the investment. C) A decision rule that always distinguishes between two investment opportunities. D) The expected value of the returns of an investment if standard deviations are known. E) A rule for investments whose returns are distributed along the normal curve. 33) Mountain Water Inc. has $20 million to invest and is looking at three projects. The company’s hurdle rate is 14%. Project A’s initial investment is $13 million and the cash flow over four years is $1 million, $2 million, $8 million, and $10 million, respectively. Project B’s initial investment is $17 million and cash flow over the same period is $10 million, $7 million, $4 million and $4 million. Project C’s initial investment is $18 million and its cash flow is $2 million, $10 million, $9 million, and $7 million, respectively. The projects are indivisible and the internal rate of returns of the three projects are 15.99%, 19.83%, and 17.91%. Idle cash earns no return. Because La Verendrye cannot undertake all three projects, what is their best investment decision? A) A B) B C) C D) None E) B and 17% of C 34) Smith Inc. of Montreal sells 75% of two million dollars of sales in the United States. Smith expects the Canadian dollar to strengthen vis-a-vis the U.S. dollar over the next year. Which of the following represents Smith’s best course of action to limit its risk of currency losses. A) Hedge the Canadian dollar depreciation risk by buying a forward contract to deliver 1.5 million U.S. dollars at today’s exchange rate. B) Hedge the Canadian dollar appreciation risk by buying a forward contract to deliver 1.5 million Canadian dollars at today’s exchange rate. C) Hedge the U.S. dollar appreciation risk by buying a forward contract to deliver 1.5 million Canadian dollars at today’s exchange rate. D) Hedge the U.S. dollar depreciation risk by buying a forward contract to deliver 1.5 million U.S. dollars at today’s exchange rate. E) Hedge the U.S. dollar appreciation risk by selling a forward contract to deliver 1.5 million U.S. dollars at today’s exchange rate. 35) Which of the following business groupings is likely to have the highest negative correlation? A) An ice cream company and a winter coat company. B) A cattle farming company and a tractor company. C) A pleasure boat company and an outboard engine company. D) A clothing store in Winnipeg and a clothing store in New York. E) A suntanning company and an ice skating manufacturer. 36) Which of the following projects would a risk-averse investor choose? A) an ENPV of $2 million and a standard deviation of $50,000. B) an ENPV of $2 million and a standard deviation of $200,000. C) an ENPV of $2 million and a standard deviation of $400,000. D) an ENPV of $1 million and a standard deviation of $200,000. E) an ENPV of $3 million and a standard deviation of $2,500,000. 37) The Maritime Cannery Company is considering a new machine that costs $100,000. It will last three years and management feels there are two possible cash flow possibilities each year, depending on whether the country is in recession or not. Year 1: 70% chance of $40,000 and 30% chance of $20,000; Year 2: 60% chance of $50,000 and 40% chance of $30,000; Year 3: 80% chance of $60,000 and 20% chance of $20,000. What is the expected net present value of the new machine if the company’s discount rate is 6%? A) ($78,000) B) ($6,583) C) $6,000 D) $13,116 E) $28,000 38) There are three projects to consider. Project A and B both have an expected return of $1,000,000. Project C has an expected return of $800,000. Which of the following statements best describes a risk-neutral investor? A) An investor who would choose to do Project A because it is closer to home, even though it has a lower risk. B) An investor who would choose to do Project B because it is closer to home, even though it has a lower risk. C) An investor who would choose to do Project B because it is closer to home, even though it has a higher risk. D) An investor who would choose to do Project C because it is closer to home, even though it has a lower risk. E) An investor who would choose to do Project C because it is closer to home, even though it has a higher risk. 39) Why are most investors risk averse? A) Most investors are risk averse because it is the fashionable thing to do when one is investing one’s own money. B) Most investors are risk averse because the idea of making an investment that has a larger standard deviation of investment returns is a good way to earn excess returns. C) Most investors are risk averse because the idea of making good gains with a small chance of a loss is more important that the idea of making a larger gain with a bigger chance of a loss. D) Most investors are risk averse because the idea of utility theory is that the richer one becomes, the less chance one wants to take to earn even more money. E) Most investors are risk averse because the risk-adjusted discount rate takes into account the current inflation rate and hopes to earn a return that beats inflation. 40) Granular Sugar Company is considering buying a new fork lift truck that will improve warehousing efficiency. the cost is $100,000 and it will last two years producing additional cash inflows of $61,500 each year. Granular’s cost of capital is 10%. What is the net present value, internal rate of return, percentage margin of safety on the cost and margin of safety on the additional cash inflow? A) $6,736, 15%, 6.7%, $3,881 B) $6,736, 14%, 7.6%, $6,358 C) $17,409, 59.7%, 45.2%, $10,031 D) $17,409, 19.7%, 9.2%, 45,329 E) $23,000, 10%, 23%, $13,253