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FINANCE 341 - Fall 2009 . Print Name: EXAM #3 - Form A ) Directions: Choose the best answer. (Keep 4 decimals uniess told otherwme.) 1 Qualcomm is consldermg sponsoring a pavilion at the upcoming World's Fair. The pavﬂlon would cost $5 million, and is expected to result in $10,000,000 of cash inflow for year 1. However, at the end of the second year the pavilion would have to be demolished and the site returned to its original condition. This would cost the firm $2,000, 000 Thus the pav1hon project’s cash flows are as follows / Net Cash Flow ($5 miltiony .+ .10 million (2 million) 1y, Which of the followmg statements is most correct? (Hmt Create an NPV profile. Round each NP\?WO? ! to the nearest dollar before you make your conclusions since some round.lng already exists in the percentages used below.) “a,. The project should be accepted if the firm’s cost of capital is greater than 77459667 percent “b, The project has two IRRs (77.459667 percent and 421.806542 percent) so the project should be accepted if the firm's cost of capital is between 0 and 77.459667 percent. - &, The project has two IRRs (77.459667 percent and 386.289032 percent) so the project should be - rejected if the firm's cost of capital is less than or equal to 77.459667 percent or greater than or equal to 386.289032 percent. H\ The project has two IRRs (77.459667 percent and 468.028764 percent) so the pm]ect should be rejected if the firm's'cost of capital is less than or equal to 77.459667 percent or greater than or equal\' to 468.028764 percent. O The project should be accepted 1f the cost of capltal is between 0 and 77.459667 percent. ¥ PN % e 1. T T, o, ! 147, 5Y‘m§,§mw A 2 Calculate the M]RR for the following project. The cost of capital is 9 percent. = 5,«. 0 L (200) Q ~14.0340 < a. . 26.73 percent 28.42 percent 27.15 percent” - 30.22 percent “e. -32.98 percent

Holub, Inc. wanis to select the best group of independent projects competing for the firm's fixed capital budget of $600,000. .(Assumme any unused portion of this budget will simply break even and does not affect your decision.) Using the summary of key data about the proposed projects below, what is the maximurm value that can be added to the firm with 2 capital budget of only $600,0007 7 PV of Inflows Project Initial Investment IRR (k= 10%) A ($200,000) 21% $240,000 B (160,000) 28 200,000 C (300,000) 23 370,600 D (130,000) 16 145,000 E (300,000) 26 390,000 a. $155,000 b. $165,000 c. $180,000 d. $135,000 none of the above Megan McDowell has just invested in a project that has the following guarterly cash flows over the next year. If interest is compounded quarterly, what is the effective annual rate of return for this project? 0 1st Qtr 2nd Qtr 3rd Qi 4th Qtr (100) 25 98.21 percent 18.65 percent 77.56 percent. 62.16 percent 55.73 percent c. d. e.

Use the following data to answer the next 4. questions: : Olmen Company is evaluating two mutually exclusxve projects (expected cash ﬂows shown below) The firm's p cost of capital is 12 percent. { Proi ect A Project B Year 0 (560) T (540) 1 90 . 380 2 260 Py 260 3 505 110 ¢ N ’tﬂ‘x/{ggL 5 5 295 2 // . E\,E&{jg GL%< f]jr) 1540 28949 ) i “Z % 5 : W (a8, ¢ 5 Calculate the IRRs for Projects A and B. : = 9\51 a4¢ aj@ a. Project A's IRR is 18.90 percent, and Project B's IRR is 20.12 percent. @ Project A's IRR is.18.90 percent, and Project B's IRR is 22.99 percent. c. - Project A's IRR is 17.22 percent, and Project B's IRR is 19.96 percent. d. Project A's IRR is 17.22 percent, and Project B's IRR is 20.12 percent. e. Project A's IRRis 16.32 percent, and Project B's IRR is 17.97 percent. 6 Calculate the Discounted Payback Penod for Project B. . 2.35 years ; e 2.17 years 1.97 years 1.69 years 1.53 years L 200 Ts .9 /OL! ";W 7 Draw the projects' NPV profiles in the space provided below. Which of the following statements is CORRECT? (Remember, these projects are mutually exclusive.) F & The NPV profiles for A and B cross at a rate of 13.73 percent. ¥ b, Project A's NPV profile crosses the horizontal axis at $295. - The crossover is cansed by the difference in reinvestment rates used by NPV and IRR and by the difference in project sizes. Y, Project B's NPV profile intercepts the vertical axis at $190. Y \e‘.‘ Project A's NPV is less sensitive to a change inthe cost of capltal Iy 51,09 NPV K ?\a ;5[i'z

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8 Which of the following conclusions is most CORRECT concerning Projects A and B? (Choose the best answer.} ¥ “a, Project B should be chosen because jts IRR i ishigher. {¥lo pgy i 7 "% MIRR will choose the same project as NPV since both methods asSuIT remvestment of interim * cashflows at the cost of capital (k). i}g i ; Project B should be chosen because its payback period is sherter so its relative nsk is lower 1} I the NPV of A were $81.07, one would be indifferent between choosmg AorB. ‘& Project A should be chosen sinee it bas the better MIRR and NPV using the firm's cost of fiapltal 29SS —Shighy { VL5, 500, 140, :L\m 20577 §1.07] th ,«, ZA5S DV ' 9 Which of the following statements 1s most FALSE? . NPV, IRR and MIRR will always agree as to whether a project bemg evaluated is profitable or not. b} A project with normal cash flows that has an IRR that exceeds the cost of capml does not necessanly = have to have a positive NPV. { {4 > v = {#¢ F i e : “" . If a project does not have interim cash flows, the RR of the pro]ect w111 equal the MIRR of the project. 7" 4. Ifa project has positive interim cash flows and IRR does not equal k, MIRR cannot be equal to IRR. “ \q\ Unlike ilc MIRR method, the IRR meﬂlod can resul‘[ in multiple rates of return. {wic \}'«f\%\‘ P e . 10 Matous & Company is currently evalua’ung two mutually exclusive projects which have the follow1ng after-tax net cash flows: o N "’/ ‘ 1500, % vzz02) = Ll ol T Project 8: o (1500) 0 B R 2 w3 | | | 1 Project L: (1500) 600 7000 - 1000 OFind pvy ‘ ' @7V s e -y < =5 LIV wgde = £l Both projects have a cost of capital of 11%. Calculate the EAA (Equivalent Annual Annuity) payments for Projects L and S, then make a decision as to which project should be chosen. Project S; its EAA payment is $185.00. . Project L; its EAA payment is $139.08. Project S; its EAA payment is $155.00. . Project L; its EAA payment is $152.70. ¢. Project S; its EAA payment is $149.22. %} WJ’@ Waé’ y po 75

11 Cerny & Company is analyzing which one of the foilowing mutually exclusive projects it shiould accept. Assume that the firm’s cost of capital is 12 percent and that both projects have normial cash flows. Which of the following statements is most CORRECT? ' S Project C Project D NPV 8422 . $410 IRR 18% 16% ¥ ‘%\ The NPV prefiles for C and D cross. {anry ¥, The NPV profiles for C and D do not cross. " T % The sum of Project D’s cash flows is less than the sum of Project C’s cash fl ¥ . - If there is a crossover rate, it is greater than the cost of capital. { 11 voued T {g} None of the above, OWS. st 12 Which of the following statements is most CORRECT? F &, The current market value of land to be used in a project should not be shown as an opportinity cost | of the project at 0 since the land is not being sold. {54 v i 150 [T Hr DU 80 SOy ] ¥ Y. When a new project takes sales from an existing product of anothei-firm, this is oftén called cannibalization. {i¥'s - within tve <om o ey T @When debt is used to raise capital for investing in a project, the interest expense from that debt’ should not be subtracted from the yearly operating income of the project when determining the project's operating cash flows. . s ¥ . Accelerating depreciation increases Net Income but decreases Net Cash Flow 7 % Sunk costs need to be included in the analysis of a project. 13 A company is trying to calculate what coupon rate would need to be assigned o a company currently has an existing bond issue with 4 7 percent coupon ratefGemi par value bond that matures in 16 years and is selling at a price of $850. 10 be on the new bond? @ 8.76 percent F\oovin «’%"‘sz b. 8.44 percent Pl bl c. 6.92 percent \'}%&%’4 d. 4.38 percent e. 4.87 percent . ‘ Ni%(fi y/g | V= ;{@ % 29 8. Iuble NTH P 6‘365 Cprmwe 25 NUPS { ?‘fi/ 5 @0’7/9\/‘,( {Q{QC%A‘Q] («.: winde -« Fa% 76

Use the following information for the next 5 questions. . : As the capital budgeting director of Houghton Printing, Peter is analyzing the replacement of a printing press. The old press was purchased 2 years ago for $70,000; it falls into the MACRS 5-year class; and it has 3 years ¢ remaining kife with a $12,000 salvage value 3 years from now. The current market value of the old press is $40,000. The new press has a price of $97,000, plus an additional $3,000 for installation and shipping. The new press falls into the MACRS 5-year class, has a 3-year economic life, and a $55,000 salvage value. The new press will require a $20,000 increase in inventory, and accounts payable is expected to increase by $14,000. The new press is expected to. increase revenue by $30,000 per year and éncrease costs by $2,000 per year. The firm- has an 11 percent cost of capital and 4 marginal tax rate of 40 percent. The MACRS 5-year class uses the following percentages: 20%, 32%, 19%, 12%, 11%, 6% (in that order). (ngmd all CFs to nearest dollar.) WorkSpace: 0\ (11 ~(,85100, 7 14450, Auaad, 1304057 [l 221 N T M (9514 ANWE (D = [aooo - (16,000).00 | 4=

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14 15 16 17 18 What is the net cash investment at Year 0? a. ‘outflow of $63,440 b.. outflow of $67,280 c. outflow of $65,120° d. outflow of $64,090 - outflow of $68,560 ‘What is the increase in tax savings due to havmg depreclatxon expense on ﬂle new machine rather than on the old machine in Year 1 (t =17 a. $5,100 . £b) $2,680 € $3,540 d. $6,700 e. None of the above. _What is the tax effect from selling the new machine at the end of the project? _a.} cash outflow of $10,400 5. cash ontflow of $15,200 " cash inflow of $15,200 cash inflow of $10,400 None of the above. .osl.océw,, Should the firm replace its older machine with the new machine? a. Yes,the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $22,246. b.. Yes,the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $20,804. C. } Yes,the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $16,381. d. Yesathe incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $18,729. e. None of the above. Since expected inflation was not built into the forecasted cash flows of the above project, then: a. “if the 11 percent cost of capital contained an inflation premium, the NPV of the above project is downward-biased (i.e. lower than it should have been calculated) b. "if the 11 percent cost of capital contained an inflation premium, the NPV of the above project is correctly calculated. c. if'the 11 percent cost of capital did nor contain an inflation premium, the NPV of the above project is correctly calculated. d both a and b are correct. &g\gg both a and ¢ are correct. 78

19 - Nathan Joyner, CEO of International Exploration, Inc. is deciding how to approach a particular oil well project. He has decided to either drill in one year atter seismic information is received on the area OR in two years after a nearby well is completed. The seismic information has a 70% chance of being positive and 30% chance of being unclear. In one year; the cost to drill the well would be $800,000 with 3 years of estimated cash flows of $500,000 if the seismic information is positive, and $200,000 if it is unclear. * Ttis believed that the nearby well has a 70% chance of being good and 30% chance of being mediocre. If good, the cash flows will be $600,000 at the end of each of the next 3 years, and $240,000 per year if mediocre. The cost of drilling the well in 2 years is expected to be $850,000. Assume a discount rate of 10 percent. What should the company do? (Reund to the nearest dollar througheut.) 4 Wait I year since the expected NPV (in today’s dollars) is $301,380 compared to the NPV of $298.426 for drilling in 2 years. b. Wait 1 year since the expected NPV (in today’s dollars) is $376,802 compared to the NPV of © $301,380 for drilling in 2 years. : @ Wait 2 years since the expected NPV (in today’s dollars} is $371,469 compared to the NPV of $282,181 for drilling in 1 year. d.- Wait 2 years since the expected NPV (in today’s doilars) is $371,469 compared to the NPV of ’ $301,380 for drilling in 1 year. . e. - None of the above numbers are within $20 of being correct. X

Use the following information for the wext 3 questions. i The CFO- of Passalugo Technology Incorporated is planning next year's cap1tal budget: It is at its optima)- capital structure, which is 15 percent debt and ‘85 percent coimmon equity, and the company's earnings anl ) dividends are growing at a constant rate of 18 percent. The last dividerd, Dg, was $0.70, and the company’s stock currently sells at a price of $22 per share. The firm can raise debt at a 9.5 percent before-tax cost, and is projecting net ‘income to be $640,000 with a dividend payout ratio of 25 percent. ~ If the firin issues new common stock, a 7 percent flotation cost will be incurred. - The firm's marginal tax rate is 40 percent. 20 What is the cost of retained earnings? g. 22,14 percent 3 21.75 percent 21.16 percent d 20.84 percent e. - 20.36 percent 21 If the company ends up spendmg $1 million of new capital, how much new common stock must be sold? a. $850,000 - b. $290,000 O Ny bb,000 (2 fira $520,000 , I\ s (& 4 §b,000 { $370,000 /N - e &8 e. None of the above biv KE i - 22 - Calculate WACCS in the MCC schedule. 19.59 percent b. 19.34 percent M{‘CQ = \“*/‘/r?i fi’M -1 )y ;. 1 8?; percent T’Ha‘ﬂ N . < = . 18.18 percent & "O{ e 4N e 0+ 55 { 20371 ) e. 17.88 percent G{ éitfiké‘ 215 J) “ Si F AR ?\g seu d. g

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23 Buzek Incorporated estimates that its retained carnings break point (BPRE) is $20 million, and ifs WACC is 12.30 percent if common equity comes from refained earnings. However, if the company issues new stock to raise new common equity, it estimates that its WACC will rise to 13.10 percent. Th company is considering the following investment prajects: , % Project Size IRR i A $10 million 1279%3 1504 B 9 million 14.7 @ 1 c 4 million 12.35(%) WG, = 1240 D 7 million 156 Q@ 125 R E 9 million 126560 1u5e “b. $26 million "¢ $25 million d. $16 million sy e. None of the above B/ Tt} #2004 4 ” Eh‘(‘:";a@// G R U amil) 24 The following tabulation gives earnings per share figures for the Longoria Company during the preceding six years. The firm’s common stock, 16 million shares outstanding, is now (1/1/09) selling for $31 per share, and the expected dividend at the end of the current year (2009) is 30 percent of the 2008 EPS. Because investors expect past trends to continue, g may be based on the eanx}\ngs growth rate. (Note that 3 years of growth are reflected in the data.) US2 Ty ™ - -5 YEAR EPS YEAR EPS e T 2003 1.61 2006 204 UG 2004 1.82 2007 2.42 Py = Lot 2006 . 191 2008 267 A SVERREY The current interest rate on new debt is 8 percent. The firm’s marginal tax rg.te is 40 percent. The firm’s capital structure, considered to be optimal, is 10 percent debt and 90 percent common equity. Calculate the weighted average cost of capital (assume that no new common stock has to be sold). a. ' 11.86 percent i - . @ 12.39 percent ¢ 12.78 percent d. 13.22 percent e. 13.84 percent CWEE, i Y WY me : ] ié\\é’:v‘ e 81

25 . Lyndsay Marzec, CFO for Marzec, Inc., recently purchased a new bulldozer. The new bulldozer costs -$60,000, and is expected to generate net after-tax operating cash flows, including depreciation, of p $28,000 per year for the 4 years that the firm is thinking about keeping it. The expected year-end { abandonment values for the bulldozer ate given below. The company’s cost of capital is 14 percent. What is the optimal economic life? (Round to the nearest dollar throughout) : YEAR CASHFLOW ABANDONMENT VALUE ¢ (60,000) : 1 28,000 48,000 2 28,000 33,000 3 - 28,000 16,000 4 28,000 0 }. Both the EAA and Replacement Chain methods confirm that the economic life is 1 year. b. Both the EAA and Replacement Chain methods confirm that the economic life is 2 years. - ‘Both the EAA and Replacement Chain methods confirm that the economic life is 3 years. - Both the EAA and Replacement Chain methods confirm that the economic life is 4 years. e. " All four possible economic lives have a negative NPV.

FINC 341 Fall 2009 O~ O0TH WK = [ P G N G G G G | PWPFPUODOMOPEMPOMPTO NRNNNN O b W = 83

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FINANCE 341 - Spring 2010 Print Name: EXAM#3 -- Form A Directions: Choose the best answer. (Keep 4 decimals unless told otherwise.) . 1 Oracle is-considering sponsoring a pavilion at the upcoming World's Fair. The pavilion project's cash flows are as follows: , f@( é | /{51 - t{g}‘ {35 7\/ Net Cash Flow . ($1 million) /\/fi\/@zxq.wm,q, {5, *4/«33) =0 «/ + -5 million, (4.3 million) < N Og ‘Which of the following statements is most CORRECT? a. The project should be accepted if the firm's cost of eapital is greater than 10.357600 percent: b." The project has two IRRs (10.357600 percent and 314.907862 percent) so the project should be - accepted if the firm's cost of capital is between 10.357600 and 314.907862 percent. c. - The project has two TRRs (10.357600 percent and 386.289032 percent) so the project should be rejected if the firm's cost of capital is less than or equal to 10.357600 percent or greater than or equal to 386.289032 percent. i ' The project has two IRRs (10.357600 percent and 289.642400 percent) so the project should be rejected if the firm's cost of capital is less than or equal to 10.357600 percent or greater than or equal to 289.642400 percent. e. The project should be accepted if the cost of capital is between 0 and 10.357600 percent. , ( 2 Help Ryan Walker calculate the MIRR for the following project. The cost of capital is 11 percent: 0 1 2 3 4 5 6 | | [ | | ! f L({400) 2001415 30%3 400k .07 20021 (50[ ,/;, = vé?-g_ : ¢ oty e T e ‘ ' 33760 Hl. 3 ) v ] (w¥)f L . N S 44LEY L~/> 22X L= A =Y, @ 22.72 percent n :é b. 23.14 percent RS iy 7 8 c. 23.98 percent AL=? 7 d. 24.29 percent - = O e. 25.12 percent A= ~44.35 k Fv= .04 84

Schneider, Tnc. wants to select the best group of independent projects competing for the firm's fixed capital budget of $700,000. (Assume any unused portion of this budget will simply break even and does not affect your decision.} Using the summary of key data about the proposed projects below, what is the . maximum value that can be added to the firm with a capital budget of only $700,0007 " ' PV of Inflows Project Initial Investment IRR k=10%) NPV? A ($156,000) 21% $190,000 Ho B (160,000) 24 130,000 30 c (250,000) 23 290000 40 D (200,000) 19 220,000 w0 E {300,000) 26 360,000 ¢o a. $130,000 ‘ b. $120,000 . c. $110,000 . d. $100,000 il Sz (2. mome of the above Vi . 3o 4y 150 o o 2 140, 20 Trey Camp invested in a project that has the following quarterly cash flows over the next 1.5 years. If interest is compounded quarterly, what is the effective annual rate of return for this project? (Round to 6 decimal places throughout.) : < . 0 0.25 0.50 0.75 1 1.25 1.50 | l [ | ! | | (600) 80 . 100 120 180 220 160 TR pors ene = ter (~tot, {80100, 120,80, 220,163 = L7734 AR #4 9.77 percent . - EAK’(’ +. 0 ‘7773‘{0@) — z = /,/5;2{ 28.02 percent [—— 12.36 percent 39.08 percent (? 45.21 percent b. c d e &5

8 10 Which of the following conclusions is most CORRECT concerning Projects A and B? (Choose the best answer.) P a." For the relevant range of k, Project A is the better project. - . L b. If'the NPV for Project A were approximately $12, the discounted payback method would give some insight as to which project would be the best one to choose. c. Project B should be chosen because its IRR is higher and its Payback Period is shorter. d. Project A has a steeper negative slope because its highest positive cash flow is its most vulnerable cash flow to an increase ink. ‘ @ Both b and d are correct. Which of the following statements is most FALSE? . a. ‘When k equals the IRR of a normal project, that project would be deemed a breakeven project by NPV, IRR and MIRR. . : b. For a normal project, if the IRR is greater than k then the NPV must be positive. @ If aproject has nonnormal cash flows, it will have more than one IRR. d. It makes sense that a massive real estate company like Archon Group in Dailas should use IRR instead of NPV in choosing between mutually exclusive projects. - e. Bothaand c are false. Paul Searle is currently evaluating two mutually exclusive projects which have the followihg after-tax net cash flows: : o~ 0 1 v 2 . . _ 2 Project 8: | ! | - (3000) 1700 1900 A=t - w 2. 99 NANel 3008, {700,190 = 73,015 7T W( ’ . ‘ Z g ) Z?- v =-73.4t4 ‘ Fv=0 Lo e g.04 Project L: q | | S : ~ g1 (3000) 1600 1300 800 A= oo : A=l /\/F\/[u/ 3007 {lmﬂ, 1302 3”5) =81.5 g 33.35 | k‘ . 7\/’_: %lfi . =0 . Both projects have a cost of capital of 11%. Calculate the EAA (g/uivalent Annual Annuity) payments for Projects L and S, then make a decision as to which project should be chosen. a. Choose Project L since its EAA payment is $12.85 greater than the EAA of Project S. b. Choose Project L since its EAA payment is $24.07 greater than the EAA of Project S, ¢. Choose Project S since its EAA payment is $15.76 greater than the EAA of Project L. @ Choose Project S since its EAA payment is $9.64 greater than the EAA of Project L. e.” None of the above. ) ‘ W 86

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11 12 13 Nathan Sitzman & Company is analyzing which one of the following mutually exclusive projects it should accept. Assume that the firm’s cost of capital is 14 percent and that both projects have normal cash flows. Which of the following statements is most CORRECT? Project C Project D NPV $894 $736. IRR 17% 17% Y The NPV profiles for C and D cross at an NPV of $0 for both projects. The NPV profiles for C and D do not cross. The sum of Project D’s cash flows is less tham the sum of Project C’s cash flows. The crossover rate is less than the IRRs of both projects. Both a and ¢ are correct. P eoor Which of the following statements is most CORRECT? a. When debt is used to raise capital for investing in a project, the interest expense from that debt needs to be subtracted from the yearly operating income of the project when determining the project's operating cash flows. b. - When the NPVs of projects with unequal lives are directly compared, the mechanics of NPV assume that when the shorter of the piojects ends, its money does not earn anything from that point forward. ¢. 'When a new project takes sales from a product of a different firm, this is often called cannibalization. : : @ Accelerating depreciation decreases Net Income but increases Net Cash Flow. /Ué" F :/(’/ L+ D ¢. Ifaproject with normal cash flows has a negative NPV, it will definitely have an MIRR and TRR that. are greater than the cost of capital. Traci Samford is trying to calculate what coupon rate would need to be assigned to a new bond issue. Her company currently has an existing bond issue with a 8 percent coupon rate, semiannual payment, $1000 par value bond that matures in 8 years and is selling at a price of $920. What coupon rate would need to be on the company’s new bond? a. 4.72 percent . ~b. 5.64 percent ;/) = /é c. - 8.92 percent i T &P 2 9.45 percent / @—_ 72 5 €. 10.13 percent /9\/': - g2 - T HO FV = ta/ 87

Use the following information for the next 5 questions. i et ’ As the capital budgeting director 6f Ronzani Sports Equipment, Claudia is analyzing the replacement of the - :ompany’s automated Frisbee molding machine. The old machine was purchased 1 year ago for $55,000; it falls into the MACRS 5-year class; and it has 3 years of remaining life with a $22,000 salvage value 3 years from now. The current market value of the machine is $44,000. : The price of a new machine is currently $75,000, plus an additional $1560 for installation and $1000 for shipping. The new machine falls into the MACRS 5-year class, has a 3-year economic life, and a $52,000 salvage value. The new machine will require a $5,000 increase in inventory, and accounts payable is expected to increase by $5,500. The new machine is expected to increase revenue by $12,000 per year and increase costs by $3,000 per year. The firm has a 12 percent cost of capital and a marginal tax rate of 40 percent. The MACRS 5-year class uses the following percentages: 20%, 32%, 19%, 12%, 11%, 6% (in that order).. (Round afl CFs to nearest dollar.) . Work Space: ‘ o . 327 197 : L7 ol 0y \ Y ~ e 3 3 t —t G L gt (7 U e %5 _Z:z/fww ! AROXY NS0 TES o ' | . 2 e 7 5662 SATE 57 { B2 (%3a0) : AR - (-7)% Quew- ol ! o Z«% F o= ({350%& 2%2@775@%{ )14/ = PP /> | fic’/fi z 6‘15”0 4—&[3&7%%7)”6}/,«'5503302744/:‘7//‘10 Z?&FB ; Et{bwlz ifx??fw)’élﬂ—wgwo)},q: géSO o it — ‘BW‘()T' TIES < (g0~ wewdf T = o0 TE, = Guw-wias)T B0 /{/Wézl "33@2@5}'@;///‘3{52’71”60 S) = 235/1 88

14 15 16 17 18 What is the net cash investment at t = 07 o S ow outflow of $30,500 outflow of $31,500 outflow of $33,000 outflow of $36,500 outflow of $56,000 What is the operating'cash flow (OCF) for Year 2 (at t=2)? a. . $5,400 6 511,140 C. $7,960 d. $10,500 e. None of the above. What is the missed tax effect from selling the old méc}fiﬂe today rather than in three years? cash outflow of $5,060 cash outflow of $2,420 cash inflow of $2,420 a. b. c. @ cash imflow of $5,060 e. None of the above. Should the firm réplace its older machine with the new machine? a. Yes, the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $1,536. {. Yes, the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $2,302. ¢. Yes, the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $4,522. d. Yes, the incremental cash flow from the new machine is sufficient to justify investing in the new machine. Buying the new machine would increase the value of the firm by $6,709. e. None of the above. Since expeéted inflation was not built into the forecasted cash flows of the above project, then: a. if the 12 percent cost of capital did not contain an inflation premium, the NPV of the above project is correctly calculated b. ifthe 12 percent cost of capital confained an inflation premium, the NPV of the above project is correctly calculated. c. .ifthe 12 percent cost of capital contained an inflation premium, the NPV of the above project is downward-biased (i.e. lower than it should have been calculated). d. both b and ¢ are correct. @ both a and ¢ are correct. 89

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Christopher Wurzbach of Wurzbach Hotels traveled to Dublin this past J anuary and is interested in building a new hotel just outside the town. The company estimates that the hotel would require an initia}- investment of $14 million. Christopher expects that the hotel will produce positive cash flows of $4 b million a year at the end of each of the next 20 years and can be salvaged (after-tax) for $25 million at =20, . Christopher recognizes that the cash fiows could, in fact, be much higher or lower, depending on whether that area becomes a popular tourist area. It is believed that at the end of two years, a 20 percent chance exists that tourism will NOT be spreading in that direction and yearly cash flows will be only $1.7 million for 20 years with an after-tax salvage value of $6 million, and an 80 percent chance exists that tourism WILL be heading that way and the yearly cash flows will be $5 million for 20 years with an after-tax salvage value of $32 million. If the firm waits two years, the initial investment will be $17 million. The project’s cost of capital is 12 percent. Should the firm proceed with the project today or should it wait two years before deciding? (Round to the nearest dollar.) S @ Build now; the NPV of building today is $3,377,254 more than the NPV for waiting two years. .. Build now; the NPV of building today is $1,114,892 more than the NPV for waiting two years. c. Build now; the NPV of building today is $890,244 more than the NPV for waiting two years. d. Wait two years; the NPV of building today is $1,214,985 less than the NPV for waiting two years. e. Wait two years; the NPV of building today is $578.276 less than the NPV for waiting two years. ﬂf\/@, ’f/‘l’,g"fl }q}, {!‘f/ ‘3) = /g.qé7m;,, . 19‘07)*“'%:12 : sy 3,37 Tmil ( P ——— ) ,,(V%Awml‘a»cufic’& ; 4 S 2 nfvﬂ% $2,717,17,713, {1, 1, 1]z -2 934 4BHC ané%‘% fo,-1, 5,37§, {z, L1913 )= I£.€¢5 4. 8= i5.0% Og 90

Use the following information for the next 3 questions. - Taylor, the CFO of Moffatt Technology Incorporated is planning next year's capital budget. I is at its optimal apital structure, which is 20 percent debt and 80 percent common equity, and the company's earnings and dividends are growing at a constant rate of 16 percent, The last dividend, Do, was $0.80, and the company’s stock currently sells at a price of $23 per share. The firm can raise debt at a 10 percent before-tax cost, and is projecting net income to be $800,000 with a dividend payout ratio of 30 percent. If the firm issues new common stock, a 6 percent flotation cost will be incurred. - The fim's marginal tax rate is 40 percent. 20 ‘What is the cost of retained eamings? “@. 20.03 percent b. 19.46 percent = ) s c. 18.82 percent ; Y %. % d. 18.04 percent __2_1, +~51/ = T el = 2095 e. 17.76 percent g 23 Te— 21 Tf the company ends up spending $1.2 million of new capital, how much new common stock must be sold? a. $160,000 : b. $960,000 /l/l = 8oty C. $520,000 » ‘3/\\,7 & $400,000 : ‘ “# ) e. None of the above _ ; 24gwo SGTT Bz K | 5620 —mpaw %& . { ) FOgre — Fos o000 B0 pet cap 2 - 2002 pewd capital x & =Yoo o 22 Calculate WACC? in the MCC schedule. @ 17.43 percent b. 18.23 percent ¢.. 17.22 percent . - d. 18.47 percent ‘Jé@) ‘5 tO T, gé‘"@-fid = {7243 e. 18.64 percent ]

23 Roland Incorporated estimates that its retained earnings break point (BPRE) is $22 million, and its WACC is 12.10 percent if common equity comes from retained carnings. However, if the company issues new stock fo raise new common equity; it estimates that its WACC will rise to 12.86 percent. The( company is cons1denng the following investment projects: ' Project Size Cost. $8 million = 4 million 4 5 million 13050 8 million R4 2 million #mfi ‘What is the firm's optimal capital budget? ’ $25 million 286 b. $20 million c. $22 million d. $24 million e. None of the above — The following tabulation gives earnings per share figures for the Will Smith Company during the K preceding six years. The firm’s common stock, 12 million shares outstanding, is now (1/1/10) selling for $14 per share, and the expected dividend at the end of the current year (2010) is 20 ‘percent of the 2009 EPS. Because investors expect past trends to continue, g may be based on the earnings growth rate. (Note that 5 years of compounded growth are reflected in the data.) vy YEAR T EPS VEAR | EPS N fer s 2004 174 2007 2.04 n=5s 5005 1 1.82 3008 T 342 7 ?{fl@ 2006 191 2009 | 251 2 =174 EJ The current interest rate on new debt is6 percent. The firm’s maI;?nFaJ tax rate is 40 percent. The firm’s capital structure, considered to be optimal, is 25 percent debt and 75 percent common equity. Calculate the weighted average cost of capital (assume that no new common stock has to be sold) 8.54 percent b 8.82 percent . .'5792. B 9.29 percent = Q ‘”5/ D A (2 ‘;)= S0P T *7é/ d. 9.67 percent i e. 10.24 percent . _ ,“ 17 el 7/ etz 25C) L +o+.75(11) = 920 7. ( 92

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Aaron Trask, CFO for Trask, Inc.; recently purchased a new delivery truck. The new truck costs $60,000, and is expected to generate net after-tax operating cash flows, including depreciation, of $28,000 per year for the 4 years that the firm is thinking about keeping it. The expected year-end - abandonment values for the truck are given below. The company’s cost of capital is 13 percent. What is the optimal economic life? (Reund to the nearest doliar throughout) YEAR ! CASH FLOW | ABANDONMENT VALUE 0 (60,000) 1 28,000 - 42,000 2 28,000 37,000 3 28,000 22,000 4 28,000 10,000 a.. The EAA method confirms that the economic life is 1 year. b. The EAA method confirms that the economic life is 2 years. ¢. The EAA method confirms that the economic life is 3-years. The EAA method confirms that the economic life is 4 years. ¢. The EAA payments for 2- and 3-year lives are equal. /(//Vv/éx Wz {%7&,%5) =g DTV - A=l =03 7\1/: 1947 T (528 Fv= 0O /1/17\/63/ ~Leyor, §Rope, 2, Rows, 3820 ) = 29418 D> Tupd=n=d ) 1203 PV=2THIR 77=[3 FV/: 0 b 35242 Bl PSR 93

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FINC 341.409 ‘ : : ' Exam #3 Form A 1D 2 A 3 E 4 A 5 B 7 E 8 E 9 ¢ 10 D 1 E 2 D i3 D 14 C 15 B 16 D 17 B 18 E 19 A 20 A 21 D 22 A 23 A 24 C D 94

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FINANCE 341 — Spring 2011 ' Print Namie: "EXAM #3 -- Form A ; - Directions: Choose the best answer. (Keep 4 decimals unless told otherwise.) Use the following information for the next 4 questions: Cecil Allred Corporation (CAC) wants to estimate next year's capital budget. It projects that its net incoine in the coming year will be $600,000, and the dividend payout ratio is 45 percent. The company's dividends and earnings are growing at a constant rate of 10 percent. The last dividend, Do, was $0.60; and its stock currently sells at a price of $15.50 per share. CAC can raise debt at a 7 percent before-tax cost. The current net price of CAC’s 9%, $100 par value, annual dividend. perpetual plefelred stock is $105. -If the company'issues new common stock, a 9 percent flotation cost will be incurred. CAC is at its optimal capital structure, which is 30 -percent debt, 10 percent preferred stock, and 60 percent equity. The firm's marginal tax rate is 40 percent. 1 What is the cost of retained earnings? . a. 14.99 percent ‘ i = b.. 15.67 percent . O ! L — o C/ al + 9 c. 16.03 percent /7 RSTIS : P i {d>14.26 percent d e e. 17.18 percent : - 4 Z L 2 \%hat is the cost of new preferred stock? 8.57 percent I le \,1«500 b. 9.78 percent th! - ’M»—i:“’ = 0857 c.. 10.12 percent 0, 105 » [ 10.89 percent 11.24 percent @ 3 What is the cost of new common stock? . a..15.18 percent (8 14.68 percent c. 16.04 percent d. 16.45 percent e. 17.02 percent 4 If the firm only spends a total of $300,000 of capital, how much of the retained earnings-expected in the coming year will not have been spent yet? a. $16,000 b. $144,000 ol e . (© $150,000 G e o2 (L ~.a5) 2200222 cwo,ee0 d. $120,000 : ‘ ’ L= { %ov,006 ™ e. $24,000 : e SN PR { 'gfi}ji):)u { 106

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Stephanie Griffis Investments estimates that its retained eamings break point (BPRE) is $15 million. and its WACC is 11.8 percent if equity comes from retained earnings. However: if the company issues new stock to raise new equity, it estimates that its WACC will rise to 12.6 percent. The company is considering the following investment projects: Project Size IRR A $6 million 12.3% 4Bt 5 milHon 14 "/C -l-milliony - - == =13 D 4 million 12 v E. .. -Tmillion 134 What is the firm's optimal capital budget? A A A a. $15 million o g Lo L 76> $13 million c. $19 million d. $17 miilion €. '$20 million Malorie Harding, Incorporated has a capital structire which ¢onsists solely of debt and common equity. The' company estimates that ‘it can issue debt at 7:25 percent. “The company's stock just paid-a $1.00 dividend per share, and the stock's price is currently $6.00. It is estimated that the-company's dividend will increase at-a coristant rate of 2 percent per year. The tax rate is 40 percent.. The company estimates that'its WACC is 14.1550 percent.” What percentage of the company's capital structure consists of debt financing?- a: 29 percent b. 26 percent c. 31 percent d7)33 percent e. None of the above e V2

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" Given the follbwilag information, which of the following statements is most FALSE? Assume that the firm’s cost of capital is 12.5 percent and that both projects have normal cash flows. ) Project A © . Project B NPV~ 564 858 o S I IRR 16% o 18% R s ‘ a. The NPV profiles for A and B must cross. b. The sum of A’s cash flows is-greater than the sum of B’s cash ﬂows. &) Project B’s profile intercepts the vertical axis at $58. d. The projects’ crossover might only be caused by the difference in reifivestment rates used by IRR and NPV. - e. Both c and d are false. Which of the following is most FALSE? @ A’sunk cost is any cost incurred to deliver and install equipment, and is included in the depreciable basis. b. If the cash flows of a project being evaluated do not inctude inflation, then if the cost of capital used . for the NPV does not include an inflation premium, the NPV for the project will be correctly {l calculated. " c. 'When calculating a project’s operating cash flows to put on'a time line so an NPV can be calculated, interest expense as a dollar amount should not be subtracted since the cost of ALL capital will be taken out when the cashi flows aré discounted to t=0 using k. d.".1f a project with normal cash flows (including interim cash flows) has an; IRR that is (TIC'ltEI than the firm’s cost of capital, then if the firm’s cost of capital increases, the project’s 'MIRR will increase. e. When the NPVs of projects with.unequal lives are directly compared, the mechanics.of NPV assumne that when the shorter of the projeets-ends, its money simply breaks even until the longer project ends. Reilly Smith invested in a project that has the following monthly cash flows over the next 6 months It interest is compounded monthly, what is the effective anmial rate of return for this project? (Round to 6 . decimal places throughout.) 0 1712 2/12 3/12 4/12 5/12 6/12 l ] [ ! | [ | (900) 180 300 320 160 30 50 5.55 percent - 9.77 percent 72.02 percent 91.12 percent T o 66.60 percent @@.ﬂ o 108

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10 11 12 Chao has been given the following project to analyze. The company’s cost of capital is 11%. Time Cash Flow : 0 (800) 1 (600) 2 (500) 3 2200 4 (300) Which of the following statements is most CORRECT? a. The IRR is equal to zero since the sum of the cash flows is 0. b. An MIRR can be calculated for this project. c. No IRR exists for this project: d. - No IRR or MIRR exists for this project. @ Both a and b are correct. Which of the following staterents is most FALSE? a. The NPV method assumes reinvestment of cash flows at the cost of capital rate. b. The Payback method does not always consider all cash flows. ¢.” The MIRR method does not always choose the better of two mutually exclusive projects if the projects are different in size. d. The Discounted Payback method considers time value of money. é} The MIRR method assumes reinvestment of cash flows at IRR, but also incorporates NPV. Jonathan Lueders is considering investing in a project that has a cost of $50,000 at =0. is expected to prodiice a uniform positive cash flow stream for 7 years beginning today (i-c. the CFs are the same for Years 0 through 6), and has a regular IRR of 6.3471%. The cost of capital for the project is 10%. What is the project's MIRR? (Round to the nearest cent throughout.) @‘ 8.58 percent b. 7.51 percent c. 7.98 percent d. " 8.08 percent e. 8.43 percent for Pt

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13 14 15 Which of the following statements is most FALSE? C) If a-project with normal cash flows has a positive NPV, it will not necessarlly have an MIRR greater b. €. than the cost of capital. - If a project with normal cash flows has an IRR that is greater than the cost of capital, then taking on ™. that project would increase-the value of the firm. If a project has normal cash flows, then the MIRR has to be between k and IRR if the pl‘OJ ect has posmve interim cash flows (cash flows between t=0 and the end of the project). If a project with normal cash flows does not have any interim cash flows, the project’s IRR will equal the project’s MIRR. : Multiple IRRs can exist fora prO]BCt if the project has nonnormal cash flows. u Calculate the MIRR for the following pl‘OjeCt The cost of capltal is 9 percent. L0 o e‘\ 8.84 percent 3 P P/ | ) | e (15 600 (85) /3?04% 10.66 percent 9 17.03 percent 19.25 percent 12.94 percent Josh Catano wants to select the best group of independent projects with a fixe capltal budget of $500.,000. (Assume any unused portion of this budget will simply break even and does not affect your decision.) Using the summary of key data about the proposed projects below, what is the maximum valve that can be added to the firm with a capital budget of only $500,0007 & s . PV of Inflows Project Initial Investment IRR (k=13%) NPV? A ($350,000) 26% $400,000 50 K B (250,000)— 24 390,000 jHoke N C (200,000)- 25 -+ 260,000 Lo 3 D (300,000) 23 L~ 400,000 2 E (50,000)~ 21 70,000 . a. $215,000 R b. $160,000 . ) (€75 $220,000 S _ Coalr el 1O d’ $170,000 . e. None of the above. Aow g N e 110

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Use the following data to answer the next 3’ quiestions: - Trey Wimberly is evaluating two mutually exclusive projects (expected cash flows shown below). The fmn s cost of capital is 15 percent. Year Project X Project ¥ (580) (570) 200 340 250 240 370 180 74,73 25.1% 4 IRR? (7.1 19,01 16 Calculate the TRRs and NPVs for Projects X and Y. Which of the following is correct? a. For Project X, the IRR'is 20.31% and the NPV is. $19.88. b. For Project X, the IRR is 19.73% and the NPV is $35.14. 7E> For Project X, the IRR is 17.44% and the NPV is $26.23. d." For Project Y, the IRR i5'18.01% and the NPV is $69.74. e, For Project Y, the IRR is 21.17% and the NPV is $25.48. 17 Calculate the Discounted Payback Period for Project Y. a.” 1.96 years P ~ b. 2.29years [ . 2 c. 2.35years LT ; d. 2.52 years @> 2.78 years 18 Draw the projects’ NPV profiles in.the space provided below. Which of the following statements is most CORRECT for the mutually exclusive projects? i a. You would choose Project Y since its IRR is higher and its payback period is shorter: b. If the cost of capital is between 15:32% and 17.44%, Project X would be chosen. c. Two crossover points exist, but only one of themn is in the positive quadrant where it would make a difference as to which project was chosen. (The second crossover rate is 467.724277 percent.) d_/Both the difference in project size and the difference in reinvestment rates used by IRR and NPV contribute to causing the profiles to cross. e.” Both c and d are correct.

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19 20 Cecil Allred is considering an investment with the following cash flows: Year Net Cash Flow 0 ($250,000) 1 . 2,250,000 v 2 e i} wlOOO) -~ Mo0,p60 Which of the following statements is most correct? (Hint: Create a simple NPV profile.) cal The project has two IRRs (5.761710 percent and 669.467557 percent) so the project should be accepted if the firm's cost of capital is between the two IRRs. The project has two IRRs (5.761710 percent and 589.467557 percent) so the project should be accepted if the firm's cost of capital is less than 5.761710 percent or greater than 589.467557 percent. ’é The project-has two IRRs (5.761710 pércent and 556.:68793 1 percent) so the project should be fi accepted if the firm's cost of capital is less than 5.761710 percent or greater than 556.687931 percent. ’d The project has two IRRs (5.761710 percent and 694.238290 percent) so the project should be accepted if the firm's cost of capital is-between the two IRRs: e: -Since part of the relevant range for K results in a negative NPV, this project should be rejected. Frank Hidalgo is currently evaluating two mutually exclusive projects which have the following after-tax net cash flows: A 2 R AT Project S: | | | (6000) 4700 2500 po L “ /\ N/\f/, , lopod 0 1 2 3 Project L: | [ | | (6000) 4300 1800 900 Both projects have a cost of capital of 12%. Calculate the EAA payment for each project. Which of the following is most CORRECT? @ Choose Project L since its EAA payment is $16.81 greater than the EAA payment of Project S. b, Choose Project S since its EAA payment is $4.02 greater than the EAA payment of Project L. c. Choose Project L since its EAA payment is $3.54 greater than the EAA payment of Project S. d. Choose Project S since its EAA payment is $8.83 greater than the EAA payment of Project L. e. Choose Project S since its EAA paymient is $17.71 greater than the EAA payment of Project L. K 112

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Use the following information for the next 4 qfieétibns. o R ) Kenneth Goodhue, Inc. is evaluating whether to replace a machine. The current machine was purchased 3 years ago for $5,000 and falls into the MACRS 3-year class. It has 3 years of remaining life and a $400 salvage ~alue three years from now. The current market value of the older machine is $1,200: Alternatively, the company could purchase a new machine for $9,000. Delivery of the new machine would cost $500 and installation would cost $300. The new machine is expected to increase inventory needs by $900. and.. accounts payable is expected to increase by $600. The new machine falls in the MACRS 3-year class. has a 3- vear economic life and a salvage value at the end of 3 years of $6,000. It is expected to.increase reévenue by $4.000 per year and increase costs by $1,000 per year. The firm has a 40% tax rate and a cost of capital 6f 13%. The MACRS 3-year class uses the following percentages: 33%, 45%, 15%, and 7% (in that order). (Round all CFs to the nearest dollar.) o ‘Work Space: pages‘ : 113

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21 22 23 24 What is the initial investment Outlay att= 0‘7 d. b. c. d. outflow.of $9,912 outflow of $10,832 outflow of $10,430 outflow of $9,568 @ outflow of $9,240 How much more tax savings will the new machme s dep1 eciation generate above that of the old machine for Year 1 (att=1)? ; a. $1,082 (B> $1,154 c. $1.294 d. $1,316 “e.. None of the above. What is the tax effect from selling the new machme at the end of the project? Should the firm replace its older machine with the new machine? cash outflow of $518 cash outflow of $792 cash outflow of $2,126 cash outflow of $1,538 cash outflow of $2,400 Yes, the NPV is +§547. Yes, the NPV is +$678. Yes, the NPV is +$2,912. Yes, the NPV is +$3,380. None of the above. 114 VR

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25 “Natedog” Joyner has become independently wealthy from discovering the Bakken shale oil field, and is discussing with T. Boone Pickens his next oil well. If the company drills today; the project would cost $900,000 today. and would provide estimated cash flows of $500,000 per year at the end of each of the next 3 years and a one-time cash outflow of $30,000 to restore the land to normal at the end of 3 years. However, if the company waits a year before drilling, the company would have more geological information regarding the well’s possibilities. The company estimates that if it waits a year, the project would cost $1,000,000 and would have a 70 percent chance of having net cash flows of $600,000 per year for 3 years, and a 30 percent chance of having net cash flows of only $460.000 per year for 3 years. and in either case, there would be a one-time cash outflow of $35,000 to restore the land to normal at the end of the 3 years. Assume a discount rate of 16 percent. What should the company do? a. Wait one year since the expected NPV (in today’s dollars) of waiting is $9.844 more than the NPV of going ahead and drilling today. b. Wait one year since the expected NPV (in today’s dollars) of waiting is $15,331 more than the NPV of going ahead and drilling today. ¢.. Go-ahead and drill now since the NPV of drilling today is $11,429 more than the expected NPV (in today’s dollars) of waiting a year. d. Go ahead and drill now since the NPV of dnlhnc today is $7,537 more than the expected NPV (in todav s dollars) of waiting a year. Qe JGo ahead and drill now since the NPV of drilling today is $4.774 more than the expected NPV. (in today s dollars)-of waiting a year. T ) F P o el Dwv")‘ | J / ”’4,1";' =000 000, Lg@d oo, 2 Li 7 / et v N ,TA ’Ts . i N P/‘/‘) " /\)P‘J? Z«OT»‘\,«' o 2 pen 63 O,uao} 08000 LA 000 / ' %Qwﬂ ( w0 N/;\J A b, 0y E | 002900 (,()7»)9(“)/ Bovony, & © 7%0,06 %w-~\,4' ) - '/()QG‘ fyres g . 115

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vine 341 Spit Exam#3 Form A O e~ N R Wb e N [9%) ErAREPETEAAEPPEEE AT FOFET 116

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