Fin315 Final Exam

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:

 https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f53g1q35g1.gif

 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.

https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f56g1q33g1.gif

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.

https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f54g1q33g1.gif

 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.

https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f54g1q26g1.gif

 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.

https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f54g1q21g1.gif

 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.

https://blackboard.uncg.edu/courses/1/FIN-315-01D-FALL2013/ppg/pearson/tm/pmfbr6g/f54g1q25g1.gif

 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