Fina361Exam3

pdf

School

University of Nebraska Medical Center *

*We aren’t endorsed by this school

Course

361

Subject

Finance

Date

Jun 4, 2024

Type

pdf

Pages

Uploaded by CorporalPencil10038

Unit Test 3 Results for Trenton Sedlacek Score for this quiz: 240 out of 280 Submitted Dec 8, 2023 at 1:16pm This attempt took 68 minutes.  Question 1 12 / 12 pts Correct! 8.03 Correct Answer 8.03 margin of error +/- 0.1  Question 2 12 / 12 pts Correct! 2.27 Correct Answer 2.27 margin of error +/- 0.1  Question 3 10 / 10 pts You are evaluating a project with the following cash flows: initial investment is $-22, and the expected cash flows for years 1 - 3 are $17, $10 and $11 (all cash flows are in millions of dollars). What is this projects NPV? The company's WACC is 14%. Express your answer in millions of dollars, rounded to 2 decimals and without the dollar sign. So, if your answer is 23.5678, just enter 23.57. You are evaluating a project with an initial investment of $15.9 million dollars, and expected cash flows of $7 million dollars each for years 1-3. What is the project's simple payback? The corporate WACC is 7%. Express your answer in years, rounded to 2 decimals. So, if your answer is 2.7654, then just enter 2.77. Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky. 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 1/11

If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative. If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative. Correct! If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero. There is no necessary relationship between a project's IRR, its WACC, and its NPV. When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high. The definition of IRR is the discount rate at which NPV is zero. Thus, this statement is true, all others are not.  Question 4 10 / 10 pts The new NPV will be lower than $100 Correct! The new NPV will be higher than $100 Since taxes affect many things, it is not possible to tell. The NPV will not change. Taxes do not affect the value of a project. There is too little information to make a forecast.  Question 5 14 / 14 pts Correct! 12.25 Suppose that you calculate the NPV of a project, and obtain a value of $100 million dollars. After completing your analysis, you find out that the corporate tax rate will change from 40% to 30%. If nothing else changes, what is the effect of this tax change on the NPV you had calculated? Assume that your company has no debt. You're evaluating a project with the following cash flows: initial investment is $119 million dollars, and cash flows for years 1-3 are $14, $60 and $89 million dollars, respectively. The firm's WACC is 6%. What is this project's MIRR? Enter your answer as a percentage, rounded to 2 decimals, without the percentage sign. So, if your answer is 0.115678, just enter 11.57. 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 2/11

Correct Answer 12.25 margin of error +/- 0.1  Question 6 10 / 10 pts Correct! The firm should reject the project, as the IRR is lower than the WACC. The firm should accept the project, as the IRR is higher than the WACC. The firm should accept the project, as the NPV is positive. The firm should accept the project, as the NPV is negative. None of these statements are true.  Question 7 10 / 10 pts The firm should accept the project, as the IRR is lower than the WACC. The firm should reject the project, as the IRR is higher than the WACC. Correct! The firm should accept the project, as the NPV is positive. The firm should reject the project, as the NPV is negative. None of these statements are true.  Question 8 10 / 10 pts Assume a new project requires an initial investment of $10 million dollars, with ensuing cash flows of $2, $4 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? Assume a new project requires an initial investment of $6 million dollars, with ensuing cash flows of $1, $3 and $5 million in years 1, 2 and 3. Assuming the company's WACC is 10%, which of the following statements is true? From a WACC calculation prepared for you by a consultant, you find that their estimation of the after tax cost of debt is 6%. Given a tax rate of 40% and a WACC of 15%, what must have been the cost of debt before adjusting for taxes? 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 3/11

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Correct! 10% 6% 2.4% 15% 3.6%  Question 9 10 / 10 pts About 50% of equity and 35% of debt About 35% of equity and 50% of debt Correct! About 59% of equity and 41% of debt About 41% of equity and 59% of debt None of these describe the capital structure of the company.  Question 10 14 / 14 pts 9.29% 9.68% 10.08% Correct! 10.50% 10.92% D $0.90 P $27.50 Suppose you decide to start your own company. You have $50,000 of your own money to use as equity, and on top of that you borrow $35,000 from a bank. Which of the following best describes the composition of the capital structure of your firm? Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D = $0.90; P = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? 0 0 0 0 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 4/11

g 7.00% D = D ´ (1 + g) $0.963 r = D /P + g 10.50%  Question 11 14 / 14 pts 7.81% 8.22% 8.65% Correct! 9.10% 9.56% Preferred stock price $92.50 Preferred dividend $8.00 Flotation cost 5.00% r = D /(P (1 - F)) 9.10%  Question 12 10 / 10 pts 1 0 s 1 0 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? Note: when flotation costs are given as a percentage instead of in dollar terms, the denominator in the formula changes from (P-F) to P*(1-F). Hint: remember that for preferred stock the growth rate of the dividend is zero. p p p Which of the following statements is not true, when describing the concept of free cash-flow? "Free cash-flow is the cash that is available after... 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 5/11

Paying variable costs Paying fixed costs Paying taxes Investing in corporate projects Correct! Paying a dividend to stock holders  Question 13 10 / 10 pts It is not. Both sources of capital are the same, and represent owner's equity. Because new common stock is riskier than retained earnings, and therefore more expensive. Actually, since retained earnings are real money, while stock is only shares of the company, retained using earnings is more expensive. Correct! Because of flotation, i.e.: the added cost of selling the new shares of stock. Because stock gains pay higher taxes than retained earnings.  Question 14 14 / 14 pts Correct! 13.14 Correct Answer 13.14 margin of error +/- 0.1 Why is issuing common stock more expensive than using retained earnings? A firm wishes to issue new shares of its stock, which already trades in the market. The current stock price is $29, the most recent dividend was $2 per share, and the dividend is expected to grow at a rate of 5% forever. Flotation costs for this issue are expected to be 11%. What is the required rate of return (or financing cost) in this new issue? Note: when flotation costs are given as a percentage instead of in dollar terms, the denominator in the formula changes from (P-F) to P*(1-F). Enter your answer as a percentage, without the percentage sign ('%'), and rounded to two decimals. So, if your answer is 0.123456, enter 12.34. 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 6/11

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

 Question 15 10 / 10 pts Correct! Interest paid on debt is tax-deductible Debt is less risky than stock Debt has a residual claim on firm cash flows Dividends are not taxable Debt is more expensive than equity  Question 16 10 / 10 pts 6.89% 7.26% 7.64% Correct! 8.04% 8.44% YTM 7.75% Tax rate 40% D $0.65 Which of the following is the reason why we deduct taxes to the cost of debt when calculating the WACC? Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The company's cost of debt (YTM) is 7.75%, its tax rate is 40%, the next expected dividend is $0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $15.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? Note: when flotation costs are given as a percentage instead of in dollar terms, the denominator in the formula changes from (P-F) to P*(1-F). 1 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 7/11

g 6.00% P $15.00 F 10.0% Weight debt 45% Weight equity 55% After-tax cost of debt = r (1 - T) 4.65% r = D /(P ´ (1 - F)) + g 10.81% WACC = w (r )(1 - T) + w (r ) = 8.04%  Question 17 14 / 14 pts Correct! 21.76 21.76 (with margin: 0)  Question 18 14 / 14 pts 0 d e 1 0 d d c s You are considering two competing (mutually exclusive) projects. The cash flows for years 0, 1, 2 and 3 are: Project A: -100, 20, 50, 90 Project B: -80, 70, 40, 20 What is the IRR of the worst project? The corporate WACC is 10%. Enter your answer as a percentage, rounded to 2 decimals, without the percentage sign. So, if your answer is 0.123456, then just enter 12.35. Assume the economy can only be in two states. It can either be booming or in recession. The probability that the economy will boom is 62%. You are considering investing in either Stock A or Stock B. If the economy booms, then the return of Stock A would be -3.2%, and the return of Stock B would be 19.2%. In a recession, the return of Stock A would be 4.4%, and the return of Stock B would be 24.5%. What is 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 8/11

Correct! -21.53 Correct Answer -21.53 margin of error +/- 0.1  Question 19 12 / 12 pts Correct! 1.27 Correct Answer 1.27 margin of error +/- 0.1  Question 20 0 / 14 pts the difference between the expected returns of these stocks? Your answer must be the result of the expected return of Stock A minus the expected return of Stock B. Enter your answer as a percentage, without the percentage sign ('%'), and rounded to 2 decimals. If your answer is negative, use the minus sign ('-'). Over the previous year you observed that a certain company's stock price had a return of 19.5%. During that same year the risk-free rate was 4.5%, and the Market Risk Premium was 11.8%. What would be your estimate of that company's beta? Enter your answer as a number (not a percentage), rounded to 2 decimals. If the answer is negative, use the minus sign ('-'). An investor is analyzing four stocks as potential investments to add to their portfolio. The investor has analyzed each stock, and has strong beliefs about the return that each could offer, calling those 'anticipated returns'. Given the information in the table below, and assuming the anticipated returns are accurate, which stock seems like the best investment? The risk-free rate is 5% and the expected return of the market is 8%. Stock Anticipated return Beta A 10% 1.6 B 10% 1.7 C 7% 0.5 D 6% 0.3 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 9/11

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

You Answered Stock A Stock B Correct Answer Stock C Stock D This can't be determined with the information given  Question 21 0 / 12 pts You Answered 5.34 Correct Answer 5.7 margin of error +/- 0.1  Question 22 10 / 10 pts Correct! When salvage value is greater than book value When salvage value is less than book value When salvage value is equal to book value You always pay taxes on salvage value You never pay taxes on salvage value  Question 23 10 / 10 pts A firm is considering the purchase of a machine which would represent an investment of $21 million, and would be depreciated in a straight-line basis over 5 years. Sales are expected to be $11 million per year, and operating costs 39% of sales. The company has a tax rate of 40%, and a WACC of 10%. What is the company’s free cash flow for year 1 of this project? Enter your answer in millions of dollars, rounded to 1 decimal, and without the dollar sign. For example, if your answer is 10.5678, enter 10.6. Use the minus sign ('-') if cash flow is negative. When do you have to pay taxes on salvage value? 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 10/11

Correct! 0% 7% 15% 33% 45%  Question 24 0 / 14 pts You Answered 49,089 Correct Answer 64,496 margin of error +/- 0.1 Quiz Score: 240 out of 280 A machine classified by the IRS so that it's depreciation can be calculated with the following percentages: 33%, 45%, 15% and 7%, for years 1 to 4, respectively. After being used for 5 years, what is the percentage of the value still left to be depreciated? Your company is considering the purchase of a new machine. After 4 years of operation, you would sell the machine for a salvage value of $41,347. However, at that time the machine would not have been depreciated to a value of 0, but have a remnant book value of $15,407. The operation of the machine requires additional NOWC of $33,525, which would not change throughout the project. The firm's corporate tax rate is 40%. What is the project's Terminal Cash Flow? Enter your answer in dollars, rounded to 2 decimals, without the dollar sing. So, if your answer is 12,345.6789, just enter 12345.68. 5/2/24, 6:28 PM Trenton Sedlacek's Quiz History: Unit Test 3 https://canvas.unl.edu/courses/159814/quizzes/336340/history?version=1 11/11