Question 1
Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
The firm’s cost of a new issue of common stock is ________. (See Table 9.2)
Answer
| [removed] | 10.2 percent | |
| [removed] | 14.3 percent | |
| [removed] | 16.7 percent | |
| [removed] | 17.0 percent |
Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.2)
Answer
| [removed] | 7.7 percent | |
| [removed] | 10.6 percent | |
| [removed] | 11.2 percent | |
| [removed] | 12.7 percent |
Table 10.4
A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:
The new financial analyst does not like the payback approach (Table 10.4) and determines that the firm’s required rate of return is 15 percent. His recommendation would be to
Answer
| [removed] | accept projects A and B. | |
| [removed] | accept project A and reject B. | |
| [removed] | reject project A and accept B. | |
| [removed] | reject both. |
What is the payback period for Tangshan Mining company’s new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
Answer
| [removed] | 4.33 years | |
| [removed] | 3.33 years | |
| [removed] | 2.33 years | |
| [removed] | None of these |
Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
Answer
| [removed] | Yes. | |
| [removed] | No. | |
| [removed] | It depends. | |
| [removed] | None of these |
Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, -$2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
Answer
| [removed] | NPV | |
| [removed] | IRR | |
| [removed] | Payback | |
| [removed] | Two of these |
A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:
The cost of this new issue of common stock is
Answer
| [removed] | 5.8 percent. | |
| [removed] | 7.7 percent. | |
| [removed] | 10.8 percent. | |
| [removed] | 12.8 percent. |
Evaluate the following projects using the payback method assuming a rule of 3 years for payback.
Answer
| [removed] | Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years. | |
| [removed] | Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B. | |
| [removed] | Project B should be accepted because you get more money paid back in the long run. | |
| [removed] | Both projects can be accepted because the payback is less than 3 years. |
Question 9
Which of the following capital budgeting techniques ignores the time value of money?
Answer
| [removed] | Payback | |
| [removed] | Net present value | |
| [removed] | Internal rate of return | |
| [removed] | Two of these |
Table 9.2
A firm has determined its optimal structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.
Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2)
Answer
| [removed] | 9.6 percent | |
| [removed] | 10.9 percent | |
| [removed] | 11.6 percent | |
| [removed] | 12.1 percent | |
|
|
Question 11
What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
Answer
| [removed] | $1,700,000 | |
| [removed] | $371,764 | |
| [removed] | ($137,053) | |
| [removed] | None of these |
A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should
Answer
| [removed] | accept both if the cost of capital is at most 15 percent. | |
| [removed] | accept only Z if the cost of capital is at most 15 percent. | |
| [removed] | accept only X if the cost of capital is at most 15 percent. | |
| [removed] | None of these |
Question 13
When the net present value is negative, the internal rate of return is ________ the cost of capital.
Answer
| [removed] | greater than | |
| [removed] | greater than or equal to | |
| [removed] | less than | |
| [removed] | equal to |
There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when
Answer
| [removed] | the NPV is greater than the crossover point. | |
| [removed] | the NPV is less than the crossover point. | |
| [removed] | the cost of capital is to the right of the crossover point. | |
| [removed] | the cost of capital is to the left of the crossover point. |
Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?
Answer
| [removed] | Project X | |
| [removed] | Project Y | |
| [removed] | Neither | |
| [removed] | Not enough information to tell |
What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
Answer
| [removed] | 15.57% | |
| [removed] | 0.00% | |
| [removed] | 13.57% | |
| [removed] | None of these |
able 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.
The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1)
Answer
| [removed] | 7.5 percent | |
| [removed] | 8.65 percent | |
| [removed] | 10.4 percent | |
| [removed] | 11.0 percent |
When evaluating projects using internal rate of return,
Answer
| [removed] | projects having lower early-year cash flows tend to be preferred at higher discount rates. | |
| [removed] | projects having higher early-year cash flows tend to be preferred at higher discount rates. | |
| [removed] | projects having higher early-year cash flows tend to be preferred at lower discount rates. | |
| [removed] | the discount rate and magnitude of cash flows do not affect internal rate of return. |
Table 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.1)
Answer
| [removed] | 7.7 percent | |
| [removed] | 10.6 percent | |
| [removed] | 11.2 percent | |
| [removed] | 12.7 percent |
able 9.1
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.
The firm’s cost of retained earnings is ________. (See Table 9.1)
Answer
| [removed] | 10.2 percent | |
| [removed] | 13.9 percent | |
| [removed] | 12.4 percent | |
| [removed] | 13.6 percent |
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