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
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10.2 percent |
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14.3 percent |
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16.7 percent |
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17.0 |
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
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7.7 percent |
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10.6 percent |
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11.2 percent |
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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
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accept projects A and B. |
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accept project A and reject B. |
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reject |
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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
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4.33 years |
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3.33 years |
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2.33 years |
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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
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Yes. |
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No. |
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It depends. |
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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
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NPV |
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IRR |
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Payback |
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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
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5.8 percent. |
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7.7 percent. |
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10.8 percent. |
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12.8 percent. |
Evaluate the following projects using the payback method assuming a rule
of 3 years for payback.
Answer
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Project A can be accepted because the payback period is 2.5 years but |
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Project B should be accepted |
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Project B should be accepted |
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Both projects can be accepted |
Question 9
Which of the following capital budgeting techniques ignores the
time value of money?
Answer
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Payback |
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Net present |
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Internal rate |
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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
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9.6 percent |
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10.9 percent |
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11.6 percent |
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12.1 percent |
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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
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$1,700,000 |
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$371,764 |
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($137,053) |
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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
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accept both if the cost of capital |
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accept only Z if the cost of |
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accept only X if the cost of capital is at most 15 percent. |
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None of these |
Question 13
When the net present value is negative, the internal rate of return is
________ the cost of capital.
Answer
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greater than |
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greater than or equal to |
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less than |
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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
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the NPV is greater than the |
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the NPV is less than the crossover |
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the cost of capital is to the right |
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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
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Project X |
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Project Y |
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Neither |
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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
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15.57% |
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0.00% |
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13.57% |
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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
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7.5 percent |
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8.65 percent |
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10.4 percent |
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11.0 percent |
When evaluating projects using internal rate of return,
Answer
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projects having lower early-year |
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projects having higher early-year |
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projects having higher early-year cash flows tend to be preferred at |
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the discount rate and magnitude of |
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
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7.7 percent |
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10.6 percent |
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11.2 percent |
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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
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10.2 percent |
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13.9 percent |
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12.4 percent |
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13.6 percent |
