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 percentTable 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 percentTable 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
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[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?
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[removed] 4.33 years[removed] 3.33 years[removed] 2.33 years[removed] None of theseShould 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?
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[removed] Yes.[removed] No.[removed] It depends.[removed] None of theseWhich 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?
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[removed] NPV[removed] IRR[removed] Payback[removed] Two of theseA 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
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[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.
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[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 theseTable 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 theseA 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
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[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 theseQuestion 13
When the net present value is negative, the internal rate of return is ________ the cost of capital.
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[removed] greater than[removed] greater than or equal to[removed] less than[removed] equal toThere is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when
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[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?
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[removed] Project X[removed] Project Y[removed] Neither[removed] Not enough information to tellWhat 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 theseable 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)
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[removed] 7.5 percent[removed] 8.65 percent[removed] 10.4 percent[removed] 11.0 percentWhen evaluating projects using internal rate of return,
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[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 percentable 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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