gb550 unit 5 quiz

1.
Teall
Development Company hired you as a consultant to help them estimate its
cost of capital. You have been provided with the following data: D1 =
$1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach,
what is the cost of common from retained earnings?
(Points : 2)
11.10%
11.68%
12.30%
12.94%

Question 2.
2.
Assume that you
are a consultant to Broske Inc., and you have been provided with the
following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What
is the cost of common from retained earnings based on the DCF approach?
(Points : 2)

9.42%
9.91%
10.44%
10.96%

Question 3.
3.
Anderson Systems is considering a project that has the
following cash flow and WACC data. What is the project’s NPV? Note that
if a project’s expected NPV is negative, it should be rejected.
WACC: 9.00%
Year 0 1 2 3
Cash flows -$1,000 $500 $500 $500
(Points : 2)

$265.65
$278.93
$292.88
$307.52

Question 4.
4.
A company’s perpetual preferred stock currently sells for
$92.50 per share, and it pays an $8.00 annual dividend. If the company
were to sell a new preferred issue, it would incur a flotation cost of
5.00% of the issue price. What is the firm’s cost of preferred stock?
(Points : 2)

7.81%
8.22%
8.65%
9.10%

Question 5.
5.
DeLong Inc. has fixed operating costs of $470,000, variable
costs of $2.80 per unit produced, and its products sell for $4.00 per
unit. What is the company’s breakeven point, i.e., at what unit sales
volume would income equal costs?
(Points : 2)

391,667
411,250
431,813
453,403

Question 6.
6.
Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?
(Points : 2)

A project’s IRR increases as the WACC declines.
A project’s NPV increases as the WACC declines.
A project’s MIRR is unaffected by changes in the WACC.
A project’s regular payback increases as the WACC declines.

Question 7.
7.
For capital budgeting and cost of capital
purposes, the firm should assume that each dollar of capital is obtained
in accordance with its target capital structure, which for many firms
means partly as debt, partly as preferred stock, and partly common
equity.
(Points : 2)

True
False

Question 8.
8.
Which of the following statements is CORRECT?
(Points : 2)

The
internal rate of return method (IRR) is generally regarded by academics
as being the best single method for evaluating capital budgeting
projects.
The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The
discounted payback method is generally regarded by academics as being
the best single method for evaluating capital budgeting projects.
The
net present value method (NPV) is generally regarded by academics as
being the best single method for evaluating capital budgeting projects.

Question 9.
9.
The cost of equity raised by retaining earnings
can be less than, equal to, or greater than the cost of external equity
raised by selling new issues of common stock, depending on tax rates,
flotation costs, the attitude of investors, and other factors.
(Points : 2)

True
False

Question 10.
10.
Which of the following statements is CORRECT?
(Points : 2)

One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project’s full life.
One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
One
defect of the IRR method versus the NPV is that the IRR does not take
proper account of differences in the sizes of projects.

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