BAR Quizzes SU 7-10

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SU 7: Capital Structure (131 total 89 first time, 42 second time) 1. In general, it is more expensive for a company to finance with equity capital than with debt capital because Investors are exposed to greater risk with equity capital. 2. Preferred and common stock differ in that Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy. 3. Capital structure decisions involve determining the proportions of financing from debt or equity 4. A firm has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the following corporate objectives is consistent with this announcement? Maximize the net worth of the firm 5. The par value of a common stock represents The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings. 6. Which one of the following situations would prompt a firm to issue debt, as opposed to equity, the next time it raises external capital? High effective tax rate 7. An entity must select from among several methods of financing arrangements when meeting its capital requirements. To acquire additional growth capital while attempting to maximize earnings per share, an entity should normally Select debt over equity initially, even though increased debt is accompanied by interest costs and a degree of risk. 8. Preferred shares are securities with characteristics of both common shares and bonds. Preferred shares have <List A> like common shares and <List B> like bonds. List A—no maturity date, list b—a fixed periodic payment 9. Larson Corp. issued $20 million of long-term debt in the current year. What is a major advantage to Larson with regards to the debt issuance? The relatively low after-tax cost due to the interest deduction 10. Which one of the following factors might cause a firm to increase the portion of debt in its financial structure? An increase in the corporate income tax rate 11. The benefits of debt financing over equity financing are likely to be highest in which of the following situations? High marginal tax rates and few noninterest tax benefits 12. Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing? Business risk 13. Which of the following statements is (are) correct regarding corporate debt and equity securities? I Both debt and equity security holders have an ownership interest in the corporation. II Both debt and equity securities have an obligation to pay income. Neither I nor II 14. Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the credit-worthiness of the company. Which of the following would best meet Bander’s financing requirements? Common stock 15. Which of the following is considered a corporate equity security? A share of callable preferred stock 16. Which one of the following statements is correct regarding the effect preferred stock has on a company? Preferred shareholders’ claims take precedence over the claims of common shareholders in the event of liquidation.

17. Which one of the following describes a disadvantage to a firm that issues preferred stock? Preferred stock is usually sold on a higher yield basis than bonds 18. Preferred and common shares differ in that Preferred shares have a higher priority than common shares with regard to earnings and assets in the event of bankruptcy. 19. Which of the following corporate characteristics would favor debt financing versus equity financing? A high tax rate 20. Which of the following items represents a business risk in capital structure decisions? Cash flow 21. If two entities, entity X and entity Y, are alike in all respects except that entity X employs more debt financing and less equity financing than entity Y does, which of the following statements is true? Entity X has more net earnings variability than entity Y. 22. Sharif Co. has total debt of $420,000 and equity of $700,000. Sharif is seeking capital to fund an expansion. Sharif is planning to issue an additional $300,000 in common stock and is negotiating with a bank to borrow additional funds. The bank requires a debt-to- equity ratio of .75. What is the maximum additional amount Sharif will be able to borrow? 330,000 23. A company currently has 1,000 shares of common stock outstanding with zero debt. It has the choice of raising an additional $100,000 by issuing 9% long-term debt or issuing 500 shares of common stock. The company has a 40% tax rate. What level of earnings before interest and taxes (EBIT) would result in the same earnings per share (EPS) for the two financing options? An EBIT of $27,000 would result in EPS of $10.80 for both. 24. Which of the following items provides the lowest-cost form of capital? Retained earnings 25. A firm needs to raise $50,000,000 for expansion. The two available options are to sell 7%, 10-year bonds at face value or to sell 5% preferred stock at par for which annual dividends would be paid. The firm’s effective income tax rate is 30%. Which one of the following best describes the difference in the firm’s cash flow for the second year after issue? Cash flow with the bond issue is $50,000 higher. 26. Which one of a firm’s sources of new capital usually has the lowest after-tax cost? Bonds 27. With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure? Common stock, preferred stock and debt outstanding 28. If a corporation’s bonds are currently yielding 8% in the marketplace, why is the firm’s cost of debt lower? Interest is deductible for tax purposes 29. The term structure of interest rates is depicted by a yield curve. What variables are plotted on the horizontal axis and on the vertical axis? Years to maturity and the interest rates, respectively . 30. What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt? To reduce the interest rate on the bonds being sold. 31. Which of the following types of bonds is most likely to maintain a constant market value? Floating-rate 32. Serial bonds are attractive to investors because Investors can choose the maturity that suits their financial needs .

33. Which one of the following characteristics distinguishes income bonds from other bonds? Income bonds pay interest only if the issuing company has earned the interest. 34. Debentures are Bonds secured by the full faith and credit of the issuing firm. 35. Junk bonds are securities rate at less than investment grade 36. Which one of the following statements is true when comparing bond financing alternatives? A call provision is generally considered detrimental to the investor. 37. From an investor’s viewpoint, the least risky type of bond in which to invest is a(n) mortgage bond 38. All of the following may allow a firm to set a lower coupon rate on a bond issued at par except a call provision 39. Which of the following scenarios would encourage a company to use short-term loans to retire its 10-year bonds that have 5 years until maturity? Interest rates have declined over the last 5 years 40. The call provision in some bond indentures allows the issuer to exercise an option to redeem the bonds . 41. All of the following statements are correct with respect to the yield curve except that the curve will be upward sloping Because investors perceive short-term investments to be less liquid and more risky . 42. Which one of the following would be the most appropriate discount rate for an investment deemed to have moderate risk? Yield on investment grade bonds 43. Which one of the following statements concerning debt instruments is correct? For long- term bonds, price sensitivity to a given change in interest rates is greater the longer the maturity of the bond . 44. The yield curve shown implies that the Long-term interest rates have a higher annualized yield than short-term rates . 45. The yield curve depicting the term structure of interest rates Is usually upward sloping . 46. The common stock of a company is currently selling at $80 per share. The leadership of the company intends to pay a $4 per share dividend next year. With the expectation that the dividend will grow at 5% perpetually, what will the market’s required return on investment be for the common stock? 10% 47. A stock priced at $50 per share is expected to pay $5 in dividends and trade for $60 per share in one year. What is the expected return on this stock? 30% 48. Dividends are equal to $5, and the current share price is $50. Dividends are expected to grow at 2% forever. According to the dividend growth model, what is the investor’s required rate of return? 12.2% 49. A manufacturer of printers is attempting to determine its cost of common equity for cost of capital purposes. The manufacturer’s long-term debt is rated AA by Standard & Poor’s. The manufacturer’s common shares trade on the NASDAQ and the current market price is $26.87. The most recent yearly common share dividend paid common shareholders was $1.04. The consensus forecast of security analysts who follow the manufacturer’s common shares is that earnings growth will average 12.5% over the long term. The manufacturer’s marginal income tax rate is 40%. Using the dividend discount

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model, what is the manufacturer’s cost of equity capital for cost of capital purposes? 16.85% 50. By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30.00, an estimated dividend at the end of the first year of $3.00 per share, and an expected growth rate of 10%. 20.0% 51. Current-year earnings are $2.00 per share. Using a discounted cash flow model, the controller determines that the common stock is worth $14 per share. Assuming a 5% long-term growth rate, the required rate of return is which one of the following? 20% 52. The CFO of a publicly traded chemical manufacturer is in the process of evaluating the company’s dividend policy in relation to shareholder value. The company’s dividend per share has been held constant at $2.30 for the last 10 years. The CFO would like to implement a 5% yearly dividend growth policy at the company starting next year. The CFO has determined that the required return in the market for the company’s stock is 13%.What is the forecasted value of the company stock in 5 years if the CFO’s dividend growth policy is implemented? 38.53 53. A corporation just paid a dividend of $2.00 per common share. Historical data indicate that dividends grow at a steady rate of 5% per year. The required rate of return for investing in such stock is 18%. The current value of one share of common stock is 16.15 54. A corporation paid a dividend of $3 per share last year. If investors expected the dividend per share to grow by 5% per year forever, what required return of investors is consistent with a current share price of $63 per share? 10% 55. The market value of an entity’s outstanding common shares will be higher, everything else equal, if investors have a lower required return on equity 56. Assume that nominal interest rates just increased substantially but that the expected future dividends for an entity over the long run were not affected. As a result of the increase in nominal interest rates, the entity’s share price should decrease 57. A firm has been growing at a rate of 10% per year and expects this growth to continue and produce earnings per share of $4.00 next year. The firm has a dividend payout ratio of 35% and a beta value of 1.25. If the risk-free rate is 7% and the return on the market is 15%, what is the expected current market value of the firm’s common stock? 20.00 58. A company is projecting an annual growth rate for the foreseeable future of 9%. The most recent dividend paid was $3.00 per share. New common stock can be issued at $36 per share. Using the constant growth model, what is the approximate cost of capital for retained earnings? 18.08% 59. An analyst is in the process of determining what the current share price should be for a company. In early January, the analyst collected the following information Based on the data provided, the current share price should be 20.00 60. The CFO of a publicly traded company is expecting to pay a dividend next year of $1.25 and projecting that the price of the company’s stock will be $45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today? 42.05 61. Stock A is currently trading at $50 per share. A financial analyst has collected the following historical and current data for the stock. The stock has a cost of equity capital

of 15% and plans to maintain a 100% dividend payout while maintaining the dividend trend in the future as well. Using the constant growth dividend discount valuation model, the analyst concludes that the value of Stock A in 20X3 would be 53.24 62. Ten years ago, perpetual preferred shares with a par value of $50 and an annual dividend rate of 6% were issued. Currently, there are no dividends in arrears. Since the issue date, interest rates have risen, and the shares are now selling at $38. The market’s current required rate of return on these shares is 7.89% 63. Global Company Press has $150 par-value preferred stock with a market price of $120 a share. The organization pays a $15 per share annual dividend. Global’s current marginal tax rate is 40%. Looking to the future, the company anticipates maintaining its current capital structure. What is the component cost of preferred stock to Global? 12.5% 64. Maloney, Inc.’s $1,000 par-value preferred stock paid its $100 per share annual dividend on April 4 of the current year. The preferred stock’s current market price is $960 a share on the date of the dividend distribution. Maloney’s marginal tax rate (combined federal and state) is 40%, and the firm plans to maintain its current capital structure. The component cost of preferred stock to Maloney would be closest to 10.4% 65. What is the after-tax cost of preferred stock that sells for $5 per share and offers a $0.75 dividend when the tax rate is 35%? 15% 66. A firm has sold 1,000 shares of $100 par, 8% preferred stock at an issue price of $92 per share. Stock issue costs were $5 per share. The firm pays taxes at the rate of 40%. What is the firm’s cost of preferred stock capital? 9.20% 67. Freemont, Inc., plans to offer a bond issue but first wants to estimate the cost of debt capital. The corporation plans to issue 2,000 bonds at 7% with $1,000 face value. Freemont’s investment bankers estimate the market rate to be 7% when the corporation issues its bonds. Freemont’s effective tax rate is 37%. What percentage is the estimated cost of debt capital of Freemont’s planned issuance? 4.41% 68. The cost of debt most frequently is measured as Actual interest rate minus tax savings . 69. A company issued common stock and preferred stock. Projected growth rate of the common stock is 5%. The current quarterly dividend on preferred stock is $1.60. The current market price of the preferred stock is $80 and the current market price of the common stock is $95. What is the expected rate of return on the preferred stock? 8% 70. Sen Corp., a publicly-traded, mid-cap company, wanted to obtain $30 million in new capital to expand its Iowa plant. Cost of capital was a factor in making the decision. Sen Corp. could either issue new preferred stock or new debentures. Sen Corp.’s underwriter estimated that preferred stock should have an annual dividend payout of $6 and an issue price of $103 per share. The debentures should have a coupon interest rate of 9% and an issue price of $101. Sen Corp.’s marginal income tax rate was 40%. Which of the following approaches describes Sen Corp.’s best strategy? Sen Corp. should issue the debentures since the after-tax cost of debt (5.347%) would be less than the cost of equity (5.825%). 71. The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm’s net cost of debt? 9.8%

72. A company recently issued 9% preferred stock. The preferred stock sold for $40 a share with a par of $20. The cost of issuing the stock was $5 a share. What is the company’s cost of preferred stock? 5.1% 73. The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25 and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage represents the firm’s cost of common equity? 12.0 74. When calculating the cost of capital, the cost assigned to retained earnings should be Lower than the cost of external common equity. 75. In calculating the component costs of long-term funds, the appropriate cost of retained earnings, ignoring flotation costs, is equal to the cost of common stock 76. A firm issued $100,000, 15-year term bonds with a coupon rate of 8% at par. Interest is paid annually to bondholders. The firm’s effective income tax rate is 35%. The firm used the proceeds to complete the purchase of a supplier whose effective income tax rate is 20%. What is the after-tax cost of debt? 5.2% 77. A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting fees of $5 per share, and annual dividends of $10 per share. If the tax rate is 40%, the cost of funds (capital) for the preferred stock is 10.4% 78. Fact Pattern: The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided: The after-tax cost to FLF Corporation of the new bond issue is 6% 79. Fact Pattern: The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided: If FLF Corporation must assume a 20% flotation cost on new stock issuances, what is the cost of new common stock? 16.25% 80. Fact Pattern: The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided: The cost of using FLF Corporation retained earnings for financing is 15% 81. DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment. The before-tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is 8.08% 82. A corporation is preparing to evaluate the capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods of analyses, the cost of capital for the firm must be estimated. The following information for the corporation is provided. If the firm must assume a 10% flotation cost on new stock issuances, what is the cost of new common stock? 15.56% 83. Fact Pattern: Rogers, Inc., operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The board of directors recently approved a large-scale remodeling of the restaurants, and the company is now

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considering two financing alternatives. The after-tax cost of the common stock proposed in Rogers’ first financing alternative would be 17.16% 84. A corporation has sold $50 million of $1,000 par value, 12% coupon bonds. The bonds were sold at a discount and the corporation received $985 per bond. If the corporate tax rate is 40%, the after-tax cost of these bonds for the first year (rounded to the nearest hundredth percent) is 7.31% 85. A corporation is selling $25 million of cumulative, non-participating preferred stock. The issue will have a par value of $65 per share with a dividend rate of 6%. The issue will be sold to investors for $68 per share, and issuance costs will be $4 per share. The cost of preferred stock to the corporation is 6.09% 86. The management of a company has been reviewing the company’s financing arrangements. The current financing mix is $750,000 of common stock, $200,000 of preferred stock ($50 par) and $300,000 of debt. The company currently pays a common stock cash dividend of $2. The common stock sells for $38, and dividends have been growing at about 10% per year. Debt currently provides a yield to maturity to the investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue of securities will have a flotation cost of approximately 3%. The company has retained earnings available for the equity requirement. The company’s effective income tax rate is 40%. Based on this information, the cost of capital for retained earnings is 15.8% 87. A profitable firm is reviewing alternatives to raise additional capital. It estimates that it can issue debt at a yield of 6% or, alternately, issue preferred shares at a yield of 7%. If the firm’s marginal income tax rate is 37%, what would be the cost for each alternative? Debt: 3.78%, preferred shares: 7.00%. 88. A company is planning to issue additional shares of common stock in a public offering. The current market price of the company’s stock is $38, and the dividend for the past year was $2.25. A well-known investment advisory firm forecasts dividend growth of 8%, and an investment banker estimates that the flotation costs would be 6% of the issue price. What cost of equity should the company use in its cost of capital calculation? 14.8% 89. On January 1, Year 1, XYZ organization issued 1,000 shares of common stock in return for $30,000. The flotation costs associated with the issuance totaled $750. In addition, XYZ issued new bonds which raised $100,000. The interest rate associated with these bonds is 10%. What formula should XYZ use to calculate the cost of new debt? Annual interest ÷ Net issue proceeds 90. An accountant must calculate the weighted-average cost of capital of the corporation using the following information. What is the weighted-average cost of capital? 12.8% 91. An entity has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be the weighted-average cost of capital 92. A company is trying to determine the cost of capital for a major expansion project. A survey of commercial lenders indicates that cost of debt is currently 8% based on the company’s debt ratio of 40%. The company complies with this requirement and has

determined that a stock issuance would require a 10% return in order to attract investors. Which of the following is the company’s cost of capital? 9.2% 93. A firm has determined that it can minimize its weighted-average cost of capital (WACC) by using a debt-equity ratio of 2/3. If the firm’s cost of debt is 9% before taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm’s WACC? 9.36% 94. The capital structure of an airline company is comprised of 50% common stock, 30% preferred stock, and 20% debt. The company’s cost of common stock is 12%, and the cost of preferred stock is 10%. The company’s pretax cost of debt is 5%. The company has an effective income tax rate of 30%. What is the company’s weighted average cost of capital (WACC)? 9.7% 95. The optimal capitalization for an organization usually can be determined by the Lowest total weighted-average cost of capital (WACC). 96. A company has the following financial information: To maximize shareholder wealth, the company should accept projects with returns greater than what percent? 9.2% 97. ABC Co. had debt with a market value of $1 million and an after-tax cost of financing of 8%. ABC also had equity with a market value of $2 million and a cost of equity capital of 9%. ABC’s weighted-average cost of capital would be 8.7% 98. A company with a combined federal and state tax rate of 30% has the following capital structure: What is the weighted-average after-tax cost of capital for this company? 9.8% 99. The theory underlying the cost of capital is primarily concerned with the cost of long- term funds and new funds 100. What is the weighted-average cost of capital for a firm using 65% common equity with a return of 15%, 25% debt with a return of 6%, 10% preferred stock with a return of 10%, and a tax rate of 35%? 11.725% 101. What is the weighted-average cost of capital for a firm with equal amounts of debt and equity financing, a 15% company cost of equity capital, a 35% tax rate, and a 12% coupon rate on its debt that is selling at par value? 11.40% 102. An entity has a tax rate of 35% and a capital structure consisting of 40% noncurrent debt, 20% preferred stock, and 40% common equity. The before-tax cost of capital for these components are 8%, 13%, and 17%, respectively. What is the entity’s weighted-average cost of capital? 11.48% 103. A firm’s target or optimal capital structure is consistent with which one of the following? Minimum weighted-average cost of capital. 104. Fact Pattern: Dzyubenko Co. reported these data at year end: What is Dzyubenko’s weighted-average cost of capital (WACC)? 9% 105. A company has the following target capital structure and costs: The company’s marginal tax rate is 30%. What is the company’s weighted-average cost of capital? 10.30% 106. The target capital structure of Traggle Co. is 50% debt, 10% preferred equity, and 40% common equity. The interest rate on debt is 6%, the yield on the preferred equity is 7%, the cost of common equity is 11.5%, and the tax rate is 40%. Traggle does not

anticipate issuing any new stock. What is Traggle’s weighted-average cost of capital? 7.10% 107. Which of the following statements is correct regarding the weighted-average cost of capital (WACC)? One of a company’s objectives is to minimize the WACC. 108. Angela Company’s capital structure consists entirely of long-term debt and common equity. The pretax cost of capital for each component is shown below. Angela pays taxes at a rate of 40%. If Angela’s weighted average cost of capital is 10.41%, what proportion of the company’s capital structure is in the form of long-term debt? 45% 109. Kielly Machines, Inc., is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. What is Kielly’s weighted-average cost of capital? 12.22% 110. Following is an excerpt from Albion Corporation’s balance sheet. The market value of Albion’s debt and equity is equal to the carrying amount. Albion’s treasurer estimates that the firm’s cost of common equity is 17% and cost of preferred stock is 12%. If Albion’s effective income tax rate is 40%, what is the firm’s cost of capital? 13.0% 111. Thomas Company’s capital structure consists of 30% long-term debt, 25% preferred stock, and 45% common equity. The cost of capital for each component is shown below. If Thomas pays taxes at the rate of 40%, what is the company’s after-tax weighted-average cost of capital? 10.94% 112. Joint Products, Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firm’s total liabilities and equity are equal to $10,000,000. The effect of this exchange on the firm’s weighted-average cost of capital is likely to be an increase, since a portion of the debt payments are tax deductible 113. The capital structure of Merritt Co. is 20% common equity and debt equal to 80%. The cost of common equity is 10% and the pretax cost of debt is 5%. Merritt’s tax rate is 21%. What is Merritt’s weighted-average cost of capital? 5.16% 114. A company provides the following financial information: What is the company’s weighted-average cost of capital? 13.3% 115. What is the weighted average cost of capital for a firm with 40% long-term debt, 20% preferred stock, and 40% common equity if the respective before-tax costs for these components are 8%, 13%, and 17%? The firm’s tax rate is 35%. 11.48% 116. Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital? I. The firm reduces its operating leverage. II. The corporate tax rate is increased. III. The firm pays off its only outstanding debt IV. The Treasury Bond yield increases. III and IV. 117. Bonds are currently trading at $1,083.34, reflecting a yield to maturity of 8%. The preferred stock is trading at $125 per share. Common stock is selling at $16 per share, and the treasurer estimates that the firm’s cost of equity is 17%. If the effective income tax rate is 40%, what is the firm’s cost of capital? 13.09%

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118. A company has a weighted-average cost of capital of 12.8%. If the after-tax cost of debt is 8%, and the weight on debt is 20%, what is the company’s cost of equity? Assume the company has no preferred stock. 14.0% 119. The weighted-average cost of capital is equal to the Rate of return on assets that covers the costs associated with the funds employed . 120. A firm has $10 million in equity and $30 million in long-term debt to finance its operations. The firm’s beta is 1.125, the risk-free rate is 6%, and the expected market return is 14%. The firm issued long-term debt at the market rate of 9%. Assume the firm is at its optimal capital structure. The firm’s effective income tax rate is 40%. What is the firm’s weighted average cost of capital? 7.8% 121. A firm’s new financing will be in proportion to the market value of its current financing shown below. The firm’s bonds are currently selling at 80% of par, generating a current market yield of 9%, and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6% dividend. The common stock has a current market value of $40 and is expected to pay a $1.20 per share dividend this fiscal year. Dividend growth is expected to be 10% per year, and flotation costs are negligible. The firm’s weighted-average cost of capital is (round calculations to tenths of a percent) 9.6% 122. Fact Pattern: The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided: The maximum capital expansion that FLF Corporation can support in the coming year without resorting to external equity financing is 5 million 123. Fact Pattern: The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided: Without prejudice to your answers from any other questions, assume that the after-tax cost of debt financing is 10%, the cost of retained earnings is 14%, and the cost of new common stock is 16%. If capital expansion needs to be $7 million for the coming year, what is the after-tax weighted-average cost of capital to FLF Corporation? 12.74% 124. DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital to DQZ. 10.50% 125. Management is planning to build a $75 million facility that will be financed according to this desired capital structure. Currently, $15 million of cash is available for capital expansion. The percentage of the $75 million that will come from a new issue of common stock is 56.00% 126. A company has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be the weighted average cost of capital 127. A company, which has no current debt, has a beta of .95 for its common stock. Management is considering a change in the capital structure to 30% debt and 70% equity.

This change would increase the beta on the stock to 1.05, and the after-tax cost of debt will be 7.5%. The expected return on equity is 16%, and the risk-free rate is 6%. Should the company’s management proceed with the capital structure change? Yes, because the weighted-average cost of capital will decrease. 128. Vivid, Inc., has determined that it needs $10,000,000 of funding to expand its operations into a foreign country. Its capital structure consists of 10% long-term debt, 20% preferred stock, 40% common stock, and 30% retained earnings. Vivid issued new debt and collected $40,000 of proceeds. The yearly interest rate is 12%. The cost of retained earnings is expected to be 13.5%, and the cost of new common stock is expected to be 17%. Vivid also can sell $200 par value preferred stock that pays a 15% dividend and has a $10 flotation cost. What is the weighted-average cost of new capital? (Round numbers to three decimal places, e.g., 0.1547 = 15.5%). 15.3% 129. Vivid, Inc., has determined that it needs $10,000,000 of funding to expand its operations into a foreign country. Its capital structure consists of 10% long-term debt, 20% preferred stock, 40% common stock, and 30% retained earnings. New debt can be issued at a cost of 15% and new preferred stock at a cost of 10%. Common stock is currently trading at $76 per share with a flotation cost of $8 per share. In addition, Vivid will pay a $6 dividend that it expects to grow 1.5% annually. What is the weighted- average cost of new capital? (Round numbers to three decimal places, e.g., 0.1547 = 15.5%). 10.4% 130. Fact Pattern: Dzyubenko Co. reported these data at year end: What is the weighted-average cost of capital (WACC) to be used in the economic value added (EVA) calculation? 9% 131. The long-term debt has an interest rate of 8%, and its fair value equaled its book value at year-end. The fair value of the equity capital is $2 million greater than its book value. Dzyubenko’s income tax rate is 25%, and its cost of equity capital is 10%. 1,380,000 Study Unit 8: Financial Valuation (290 90 batch 1, 86 batch 2) 1. An individual received an inheritance from a grandparent’s estate. The money can be invested, and the individual can either (a) receive a $20,000 lump-sum amount at the end of 10 years or (b) receive $1,400 at the end of each year for the next 10 years. The individual wants a rate of return of 12% and uses the following information: What is the preferred investment option and what is its net present value? Option b; $7,910. 2. A company uses the internal rate of return (IRR) method to evaluate capital projects. The company is considering four independent projects with the following IRRs: The company’s cost of capital is 13%. Which one of the following project options should the company accept based on IRR? Projects III and IV only 3. A company is evaluating four projects as possible investments. All of the projects are for the same activity. The company will select only one project. The company’s discount rate for such projects is 10%, and the tax rate is 40%. The company’s reinvestment rate is 10%. Additional information about the projects is as follows: Which project would be most advantageous to the company? Project A

4. Harvey Co. is evaluating a capital investment proposal for a new machine. The investment proposal shows the following information: If acquired, the machine will be depreciated using the straight-line method. The payback period for this investment is 2.5 years 5. A company borrows to buy a machine for $400,000 at a borrowing rate of 5% on January 1, Year 1. The average tax rate of the company is 30%. The loan is repaid with equal payments within 2 years, with the first payment made on December 31, Year 1. What is the present value of the cash inflow relating to the interest from the machine? 8501 6. A company is considering a project that calls for an initial cash outlay of $50,000. The expected net cash inflows from the project are $7,791 for each of 10 years. What is the IRR of the project? 9% 7. Fact Pattern: Tam Co. is negotiating to purchase equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Accrual accounting rate of return based on initial investment to Tam Co. is 10% 8. Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000, and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the numerator in the ratio? 40,000 9. The capital budgeting technique known as the accounting rate of return uses revenue over life of project—yes, depreciation expense—yes 10. The accounting rate of return Focuses on income as opposed to cash flows. 11. Fact Pattern: Jorelle Company’s financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment’s life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return. The net present value for the investment proposal is 106,160 12. A company has estimated that a proposed project’s 10-year annual net cash benefit, received each year end, will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year. Assuming that these cash inflows satisfy exactly the company’ required rate of return of 8%, what is the initial cash outlay? 19,090 13. A corporation uses net present value techniques in evaluating its capital investment projects. The corporation is considering a new equipment acquisition that will cost $100,000, fully installed, and have a zero salvage value at the end of its 5-year productive life. The corporation will depreciate the equipment on a straight-line basis for both financial and tax purposes. The corporation estimates $70,000 in annual recurring operating cash income and $20,000 in annual recurring operating cash expenses. The

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corporation’s desired rate of return is 12% and its effective income tax rate is 40%.What is the net present value of this investment on an after-tax basis? 36,990 14. The capital budgeting technique known as net present value uses cash flow over life of project—yes, time value of money—yes 15. Net present value as used in investment decision-making is stated in terms of which of the following options? Cash flows 16. Which of the following changes would result in the highest present value? A $100 decrease in taxes each year for 4 years . 17. The NPV of a project has been calculated to be $215,000. Which one of the following changes in assumptions would decrease the NPV? Increase the discount rate 18. When using the net present value method for capital budgeting analysis, the required rate of return is called all of the following except the risk-free rate 19. The net present value of an investment project represents the Excess of the discounted cash inflows over the discounted cash outflows . 20. Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it Reduces the cash outlay for income taxes. 21. A project should be accepted if the present value of cash flows from the project is greater than the initial investment 22. A company invests $100,000 in property. The company has a contract to sell it for $120,000 in one year. The bank has a guaranteed interest rate of 10%. What is the net present value of the company’s investment in the property? 9091 23. New equipment purchased at the beginning of Year 1 has (1) a cost of $155,000, (2) an estimated useful life of 5 years, and (3) a salvage value of $5,000. Assuming a tax rate of 30% and a discount rate of 5%, what is the total straight-line depreciation tax shield during the life of the equipment measured at the beginning of Year 1? 38,966 24. Chan Co. purchased equipment for $55,500 on January 1, Year 2, the first day of the fiscal year. The equipment has an estimated useful life of 3 years and an estimated residual value of $3,000. The average tax rate is 30%, and the discount rate is 10%. What is the total straight-line depreciation tax shield during the life of the equipment measured at December 31, Year 2? 14,361 25. Option 1: Sell the old equipment for $50,000 and use the proceeds with a loan of $450,000 to buy new equipment. The interest rate of the loan is 5%, and it will be repaid by equal payments in 10 years. The first payment will be due on December 31, Year 1. The cost of the old equipment is $300,000, with accumulated straight-line depreciation of $240,000, a remaining useful life of 2 years, and no salvage value. The new equipment has an estimated useful life of 10 years and no salvage value. It will be depreciated for tax purposes using the straight-line method. What is the present value of the total relevant cash inflows relating to depreciation? 99,091 26. A new venture will require an initial investment in fixed assets of $20,000 and in working capital of $10,000. The fixed assets will have no salvage value at the end of the project’s 4-year life, and the working capital will be completely recovered at the end of the project. The organization’s cost of capital is 16%. At a time value of money of 16%, the present value of an ordinary annuity of $1/year for 4 years is 2.8, and the present value of $1 at

the end of 4 years is 0.6. What is the annual net cash inflow required for the project to break even on a time-adjusted basis? 8571 27. An investment in a new product will require an initial outlay of $20,000. The cash inflow from the project will be $4,000 a year for the next 6 years. The payment will be received at the end of each year. What is the net present value of the investment at 8% using the correct factor from below? - 1508.48 28. The following information pertains to Krel Co.’s computation of net present value relating to a contemplated project: 300,000 29. Fact Pattern: Tam Co. is negotiating to purchase equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Net present value to Tam Co. is 13,000 30. Oak Co. bought a machine that will depreciate on the straight-line basis over an estimated useful life of 7 years. The machine has no salvage value. Oak expects the machine to generate after-tax net cash inflows from operations of $110,000 in each of the 7 years. Oak’s minimum rate of return is 12%. Information on present value factors is as follows: Assuming a positive net present value of $12,000, what was the cost of the machine? 490,040 31. Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first 2 years and by $20,000 in Year 3. Present values of an annuity of $1 at 14% areUsing a 14% cost of capital, what is the present value of these future savings? 62,900 32. Para Co. is reviewing the following data relating to an energy-saving investment proposal: Ignoring the tax effect, what would be the annual savings needed to make the investment realize a 12% yield? 12,306 33. Yarrow Co. is considering the purchase of a new machine that costs $450,000. The new machine will generate net cash flow of $150,000 per year and net income of $100,000 per year for 5 years. Yarrow’s desired rate of return is 6%. The present value factor for a 5- year annuity of $1, discounted at 6%, is 4.212. The present value factor of $1, at compound interest of 6% due in 5 years, is 0.7473. What is the new machine’s net present value? 181,800 34. A corporation is considering purchasing a machine that costs $100,000 and has a $20,000 salvage value. The machine will provide net annual cash inflows of $25,000 per year and has a 6-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum 6 years in the future is 0.564. The discount factor for the present value of an annuity for 6 years is 4.355. What is the net present value of the machine? 20,155 35. Salem Co. is considering a project that yields annual net cash inflows of $420,000 for Years 1 through 5 and a net cash inflow of $100,000 in Year 6. The project will require an initial investment of $1,800,000. Salem’s cost of capital is 10%. Present value

information is presented below: What was Salem’s expected net present value for this project? - 152,200 36. Given a 10% discount rate with cash inflows of $3,000 at the end of each year for 5 years and an initial investment of $11,000, what is the net present value? 370 37. A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property? 11,500 38. A company is considering two mutually exclusive projects with the following projected cash flows: If the company’s objective is to maximize shareholder wealth, which one of the following is the most valid reason for selecting one of the projects? The net present value of Project A is greater than the net present value of Project B; therefore, select Project A. 39. What is the approximate IRR for a project that costs $50,000 and provides cash inflows of $20,000 for 3 years? 10% 40. Which of the following phrases defines the internal rate of return on a project? The discount rate at which the net present value of the project equals zero. 41. What is an internal rate of return? A time adjusted rate of return from an investment 42. Which of the following events would decrease the internal rate of return of a proposed asset purchase? Decrease tax credits on the asset 43. The capital budgeting technique known as internal rate of return uses cash flows over entire life of project—yes, time value of money—yes 44. How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations. Residual sales value of project—include, depreciation expense—exclude 45. Neu Co. is considering the purchase of an investment that has a positive net present value based on Neu’s 12% hurdle rate. The internal rate of return would be >12% 46. A weakness of the internal rate of return (IRR) approach for determining the acceptability of investments is that it Implicitly assumes that the firm is able to reinvest project cash flows at the project’s internal rate of return. 47. The internal rate of return (IRR) is the Rate of interest for which the net present value is equal to zero. 48. The internal rate of return for a project can be determined By finding the discount rate that yields a net present value of zero for the project . 49. Wilkinson, Inc., which has a cost of capital of 12%, invested in a project with an internal rate of return (IRR) of 14%. The project is expected to have a useful life of 4 years, and it will produce net cash inflows as follows: The initial cost of this project amounted to 7483 50. Which of the following metrics equates the present value of a project’s expected cash inflows to the present value of the project’s expected costs? Internal rate of return 51. All of the following are methods used to evaluate investments for capital budgeting decisions except required rate of return 52. Oliver Co. is considering investing in a project with a profitability index of 1.0 based on the present value of future net cash flows. The cost of capital of the project is 15%, the

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risk-free interest rate is 3%, and the market rate of return is 6%. What is the internal rate of return (IRR) of the project? 15% 53. Kern Co. is planning to invest in a 2-year project that is expected to yield cash flows from operations, net of income taxes, of $50,000 in the first year and $80,000 in the second year. Kern requires an internal rate of return of 15%. The present value of $1 for one period at 15% is 0.870 and for two periods at 15% is 0.756. The future value of $1 for one period at 15% is 1.150 and for two periods at 15% is 1.323. The maximum that Kern should invest immediately is 103,980 54. Clifford Co. calculates the net present value (NPV) of a potential project for different discount rates. Based on the following results, what is the approximate internal rate of return (IRR) of the project? 6.1% 55. If the internal rate of return (IRR) of an investment is greater than its cost of capital, the net present value is greater than zero 56. Clark Co., which has a 14% cost of capital, invests in a project with an internal rate of return (IRR) of 16%. Over the 3-year life of the project, it is expected to generate net cash inflows of $20,000 at the end of the first year and $35,000 at the end of the second year. To recover the initial investment of $55,000, what is the minimum net cash inflow at the end of the last year of the project? 18,339 57. A characteristic of the payback method (before taxes) is that it neglects total project profitability 58. Which of the following is a valid method of calculating the internal rate of return? Plot three or four combinations of net present value (NPV) and discount rate on a graph, connect the points with a smooth line, and locate the discount rate at which NPV = 0. 59. A company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. The company is subject to a 40% income tax rate. To meet the company’s payback goal, the sorter must generate reductions in annual cash operating costs of 190,000 60. A company is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. The company uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, the company uses a goal of a 4-year payback period. To meet the desired payback period, the press must produce a minimum annual before-tax operating cash savings of 110,000 61. Which of the following statements is true regarding the payback method? It does not consider the time value of money 62. A company purchases an item for $43,000. The salvage value of the item is $3,000. The cost of capital is 8%. Pertinent information related to this purchase is as follows: What is the discounted payback period in years? 3.25 63. Fact Pattern: Tam Co. is negotiating to purchase equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the

equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of $1 at 12% for 10 periods is 5.65. Present value of $1 due in 10 periods at 12% is .322. Payback period to Tam Co. is 5.0 years 64. Major Corp. is considering the purchase of a new machine for $5,000 that will have an estimated useful life of 5 years and no salvage value. The machine will increase Major’s after-tax cash flow by $2,000 annually for 5 years. Major uses the straight-line method of depreciation and has an incremental borrowing rate of 10%. The present value factors for 10% are as follows: Using the payback method, how many years will it take to pay back Major’s initial investment in the machine? 2.50 65. In considering the payback period for three projects, Fly Corp. gathered the following data about cash flows: Which of the projects will achieve payback within 3 years? Projects B and C 66. A project has an initial outlay of $1,000. The projected cash inflows are what is the investment’s payback period? 3.5 years 67. Which of the following statements is correct regarding the payback method as a capital budgeting technique? The payback method provides the years needed to recoup the investment in a project. 68. Which one of the following statements about the payback method of investment analysis is correct? The payback method does not consider the time value of money 69. A company is planning to acquire a $250,000 machine that will provide increased efficiencies, thereby reducing annual operating costs by $80,000. The machine will be depreciated by the straight-line method over a 5-year life with no salvage value at the end of 5 years. Assuming a 40% income tax rate, the machine’s payback period is 3.68 years 70. If the present value of expected cash inflows from a project equals the present value of expected cash outflows, the discount rate is the internal rate of return 71. A company invested in a new machine that will generate revenues of $35,000 annually for 7 years. The company will have annual operating expenses of $7,000 on the new machine. Depreciation expense, included in the operating expenses, is $4,000 per year. The expected payback period for the new machine is 5.2 years. What amount did the company pay for the new machine? 166,400 72. A company is investing in a machine costing $365,000. The following table shows selected financial data for the company for the next 5 years: What is the payback period on this machine? 3.8 years 73. In capital budgeting, which of the following items is included in the payback model calculation? The total amount of the initial outlay for the project 74. A limitation of using the discounted payback method to evaluate a project is that it ignores which of the following? Cash flows after the payback period 75. PB Company is evaluating an investment project based on its payback period. The policy is to reject the investment project if it has a payback period greater than 4 years. The project will generate cash flows as shown in the following table: The project is rejected

because its payback period exceeds PB’s standard by 0.625 years. What is the initial investment required for the project? 1,600,000 76. A company is considering four independent investment proposals. The company has $3 million available for investment during the present period. The investment outlay for each project and its projected net present value (NPV) is presented below. Which of the following project options should be recommended to the company’s management? Projects I, II and III only 77. The profitability index approach to investment analysis Always yields the same accept/reject decisions for independent projects as the net present value method. 78. Mesa Company is considering an investment to open a new banana processing division. The project involves an initial investment of $45,000, and cash inflows of $20,000 can be expected in each of the next 3 years. The hurdle rate is 10%. The present value of an ordinary annuity of 1 discounted at 10% for 3 periods is 2.487. The present value of 1 due in 3 periods discounted at 10% is .751. What is the profitability index for the project? 1.1053 79. The profitability index is a variation on which of the following capital budgeting models? Net present value 80. What is the formula for calculating the profitability index of a project? Divide the present value of the annual after-tax cash flows by the original cash invested in the project. 81. Which of the following is a limitation of the profitability index? It requires detailed long-term forecasts of the project’s cash flows . 82. When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project that has the greater profitability index 83. If an investment project has a profitability index of 1.15, the net present value of the project is positive 84. A company is in the enviable situation of having unlimited capital funds. The best decision rule, in an economic sense, for it to follow would be to invest in all projects in which the net present value if greater than zero 85. The profitability index (excess present value index) is the ratio of the discounted net cash flows to initial investment 86. Fact Pattern: Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year: Which projects should Maloney undertake during the upcoming year if it has only $12,000,000 of investment funds available? Projects 1 and 2 87. Fact Pattern: Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year: Which project(s) should Maloney undertake during the upcoming year if it has only $6,000,000 of funds available? Project 1 88. Which of the following should be used if capital rationing needs to be considered when comparing capital projects? Profitability index

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89. A company requires a rate of return of at least 15% for four potential projects. The company has a maximum of $1,000,000 each year for investment. Uninvested amounts can be rolled forward indefinitely, and no other capital is available. The company’s policy is not to invest in projects with a net present value (NPV) lower than $40,000. The following are details about the four projects: If the uninvested amount at the beginning of the current year is $200,000, which projects are acceptable? Projects 1 2 and 3 90. A company requires a rate of return of 15% for four potential projects. The company has a maximum of $1,000,000 each year for investment. No other capital is available. The following are details about the four projects: Which projects should be accepted? Projects 2 3 and 4 91. The method that divides a project’s annual after-tax net income by the average investment cost to measure the estimated performance of a capital investment is the accounting rate of return method 92. The technique that measures the number of years required for the after-tax cash flows to recover the initial investment in a project is called the payback method 93. Which of the following decision-making models equates the initial investment with the present value of the future cash inflows? Internal rate of return 94. The technique that measures the estimated performance of a capital investment by dividing the project’s annual after-tax net income by the average investment cost is called the accounting rate of return method 95. The technique that incorporates the time value of money by determining the compound interest rate of an investment such that the present value of the after-tax cash inflows over the life of the investment is equal to the initial investment is called the Internal rate of return method 96. The length of time required to recover the initial cash outlay of a capital project is determined by using the payback method 97. The technique used to evaluate all possible capital projects of different dollar amounts and then rank them according to their desirability is the profitability index method 98. The method that recognizes the time value of money by discounting the after-tax cash flows over the life of a project, using the company’s minimum desired rate of return, is the net present value method 99. The technique that reflects the time value of money and is calculated by dividing the present value of the future net after-tax cash inflows that have been discounted at the desired cost of capital by the initial cash outlay for the investment is called the profitability index method 100. Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method? Profitability index 101. Fresh Co. is purchasing new equipment at a price of $160,000. The new equipment is expected to save $30,000 in cash payments annually. The equipment’s estimated useful life is 8 years, with no residual value, and it is depreciated using the straight-line method. Fresh’s predetermined minimum desired rate of return is 11%. The present value of an annuity of $1 at 11% for 8 periods is 5.146. Present value of $1 due in

8 periods at 11% is .434. Assuming an effective tax rate of 40%, what is the net present value based on the information above? -26,204 102. A project’s net present value, ignoring income tax considerations, is normally affected by the Proceeds from the sale of the asset to be replaced. 103. The calculation of depreciation is used in the determination of the net present value of an investment for which of the following reasons? Depreciation increases cash flow by reducing income taxes. 104. Which of the following is an advantage of net present value modeling? It accounts for compounding of returns. 105. A firm uses the net present value method to evaluate capital projects. The firm’s required rate of return is 10%. The firm is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of 4 years. The projected after-tax cash flows associated with these projects are as follows: Assuming adequate funds are available, which of the following project options would you recommend that the firm’s management undertake? Project X only 106. Skytop Co., a nonprofit entity, is considering acquiring a machine for $80,000 that will produce uniform cash inflows of $25,000 for four years. Skytop evaluates capital projects using discounted cash flows at a cost of capital of 10% per year. Based upon the following table, what action should Skytop take regarding acquisition of the machine, and why? Acquire—no, reason—net present value if -750 107. The net present value of a proposed investment is negative; therefore, the discount rate used must be Greater than the project’s internal rate of return. 108. A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return? Less than the project’s internal rate of return . 109. Fact Pattern: Jorelle Company’s financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment’s life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return. The traditional payback period for the investment proposal is 2.23 years 110. A company provides the following information about discount factors and yearly cash flows: If the discounted payback method is used, an outlay of $1,000 cash would most likely result in payback in which of the following months? Month 42 111. A company has unlimited capital funds to invest. The decision rule for the company to follow in order to maximize shareholders’ wealth is to invest in all projects having a(n) Net present value greater than zero. 112. Fact Pattern: Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year: Which project(s) should Maloney undertake during the upcoming year assuming it has no budget restrictions? Projects 1 2 and 4

113. A company has a required rate of return of 15% for five potential projects. The company has a maximum of $500,000 available for investment and cannot raise any capital. Details about the five projects are as follows: The company should choose which of the following projects? Projects 2 4 and 5 114.

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BAR Quizzes SU 7-10

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