fin315 final exam

Question 1

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.


The firm's cost of a new issue of common stock is ________. (See Table 9.2)

Answer

		10.2 percent
		14.3 percent
		16.7 percent
		17.0 percent

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.


The firm's before-tax cost of debt is ________. (See Table 9.2)

Answer

		7.7 percent
		10.6 percent
		11.2 percent
		12.7 percent

Table 10.4

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

The new financial analyst does not like the payback approach (Table 10.4) and determines that the firm's required rate of return is 15 percent. His recommendation would be to

Answer

		accept projects A and B.
		accept project A and reject B.
		reject project A and accept B.
		reject both.

What is the payback period for Tangshan Mining company's new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?

Answer

		4.33 years
		3.33 years
		2.33 years
		None of these

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?

Answer

		Yes.
		No.
		It depends.
		None of these

Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, -$2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?

Answer

		NPV
		IRR
		Payback
		Two of these

A firm has common stock with a market price of $100 per share and an expected dividend of $5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for $98, with $2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total $1 per share. The dividends paid on the outstanding stock over the past five years are as follows:



The cost of this new issue of common stock is

Answer

		5.8 percent.
		7.7 percent.
		10.8 percent.
		12.8 percent.

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

Answer

		Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years.
		Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a $1,000,000 payoff in the 4th year in Project B.
		Project B should be accepted because you get more money paid back in the long run.
		Both projects can be accepted because the payback is less than 3 years.

Question 9

Which of the following capital budgeting techniques ignores the time value of money?

Answer

		Payback
		Net present value
		Internal rate of return
		Two of these

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.
Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.


Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2)

Answer

		9.6 percent
		10.9 percent
		11.6 percent
		12.1 percent

Question 11

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?

Answer

		$1,700,000
		$371,764
		($137,053)
		None of these

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should

Answer

		accept both if the cost of capital is at most 15 percent.
		accept only Z if the cost of capital is at most 15 percent.
		accept only X if the cost of capital is at most 15 percent.
		None of these

Question 13

When the net present value is negative, the internal rate of return is ________ the cost of capital.

Answer

		greater than
		greater than or equal to
		less than
		equal to

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

Answer

		the NPV is greater than the crossover point.
		the NPV is less than the crossover point.
		the cost of capital is to the right of the crossover point.
		the cost of capital is to the left of the crossover point.

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?

Answer

		Project X
		Project Y
		Neither
		Not enough information to tell

What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?

Answer

		15.57%
		0.00%
		13.57%
		None of these

able 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.


The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1)

Answer

		7.5 percent
		8.65 percent
		10.4 percent
		11.0 percent

When evaluating projects using internal rate of return,

Answer

		projects having lower early-year cash flows tend to be preferred at higher discount rates.
		projects having higher early-year cash flows tend to be preferred at higher discount rates.
		projects having higher early-year cash flows tend to be preferred at lower discount rates.
		the discount rate and magnitude of cash flows do not affect internal rate of return.

Table 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.


The firm's before-tax cost of debt is ________. (See Table 9.1)

Answer

		7.7 percent
		10.6 percent
		11.2 percent
		12.7 percent

able 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of
2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.


The firm's cost of retained earnings is ________. (See Table 9.1)

Answer

		10.2 percent
		13.9 percent
		12.4 percent
		13.6 percent