# finance data bank

Question # 00005286 Posted By: spqr Updated on: 12/13/2013 02:08 PM Due on: 12/15/2013
Subject Finance Topic Finance Tutorials:
Question

105. Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years, and you've decided to bid on the contract. It will cost you \$1,170,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in 7 years, this equipment can be salvaged for \$75,000. Your fixed production costs will be \$360,000 per year, and your variable production costs should be \$12.75 per carton. You also need an initial investment in net working capital of \$112,500, all of which will be recovered when the project ends. Your tax rate is 32 percent and you require a 13 percent return on your investment. What bid price per carton should you submit?
A. \$17.04
B. \$16.56
C. \$15.79
D. \$15.03
E. \$14.81

106. Chapman Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for \$576,000 is estimated to result in \$192,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of \$84,000. The press also requires an initial investment in spare parts inventory of \$24,000, along with an additional \$3,600 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 35 percent and its discount rate is 11 percent. Should the firm buy and install the machine press? Why or why not? A. no; The net present value is -\$7,489.
B. no; The net present value is -\$667.
C. yes; The net present value is \$211.
D. yes; The net present value is \$4,319.
E. yes; The net present value is \$8,364.

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107. Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs \$427,000, has a 6-year life, and requires \$112,000 in pretax annual operating costs. System B costs \$517,000, has an 8-year life, and requires \$79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?
A. A; The net present value is \$211,516.
B. A; The net present value is -\$582,720.
C. A; The net present value is -\$314,216.
D. B; The net present value is \$308,222.
E. B: The net present value is -\$625,123.

108. Consider a project to supply 60,800,000 postage stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel of land available that cost \$760,000 five years ago; if the land were sold today, it would net you \$912,000, aftertax. The land can be sold for \$1,500,000 after taxes in 5 years. You will need to install \$2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life. The equipment can be sold for \$456,000 at the end of the project. You will also need \$469,000 in initial net working capital for the project, and an additional investment of \$38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.38 cents per stamp, and you have fixed costs of \$608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit?
A. \$0.018
B. \$0.020
C. \$0.023
D. \$0.026
E. \$0.029

40. Chelsea Fashions is expected to pay an annual dividend of \$0.80 a share next year. The market price of the stock is \$22.40 and the growth rate is 5 percent. What is the firm's cost of equity?
A. 7.58 percent
B. 7.91 percent
C. 8.24 percent
D. 8.57 percent
E. 9.00 percent

41. The Shoe Outlet has paid annual dividends of \$0.65, \$0.70, \$0.72, and \$0.75 per share over the last four years, respectively. The stock is currently selling for \$26 a share. What is this firm's cost of equity?
A. 7.56 percent
B. 7.93 percent
C. 10.38 percent
D. 10.53 percent
E. 11.79 percent

42. Sweet Treats common stock is currently priced at \$19.06 a share. The company just paid \$1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm's cost of equity?
A. 6.03 percent
B. 6.18 percent
C. 8.47 percent
D. 8.68 percent
E. 8.82 percent

43. The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent. The current stock price is \$11.40. What was the amount of the last dividend paid?
A. \$2.07
B. \$2.11
C. \$2.19
D. \$2.22
E. \$2.26

44. Highway Express has paid annual dividends of \$1.16, \$1.20, \$1.25, \$1.10, and \$0.95 over the past five years respectively. What is the average dividend growth rate?
A. -4.51 percent
B. -3.60 percent
C. 2.28 percent
D. 2.47 percent
E. 4.39 percent

45. Southern Home Cookin' just paid its annual dividend of \$0.65 a share. The stock has a market price of \$13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity?
A. 9.98 percent
B. 10.04 percent
C. 10.12 percent
D. 10.37 percent
E. 10.45 percent

46. National Home Rentals has a beta of 1.38, a stock price of \$19, and recently paid an annual dividend of \$0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm's cost of equity?
A. 7.05 percent
B. 8.67 percent
C. 9.13 percent
D. 10.30 percent
E. 11.56 percent

47. Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market. The stock is currently selling for \$17 a share. The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock?
A. 8.7 percent
B. 9.2 percent
C. 10.6 percent
D. 11.3 percent
E. 11.7 percent

48. Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.60?
A. 0.88 percent
B. 1.07 percent
C. 1.50 percent
D. 2.10 percent
E. 2.26 percent

49. Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is \$1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt?
A. 3.98 percent
B. 4.42 percent
C. 4.71 percent
D. 5.36 percent
E. 5.55 percent

50. Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of \$1,000 and a current market price of \$1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent?
A. 2.97 percent
B. 3.24 percent
C. 3.78 percent
D. 5.21 percent
E. 5.53 percent

51. Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of \$1,000 and a current market price of \$640. What is the company's pre-tax cost of debt?
A. 2.55 percent
B. 5.09 percent
C. 5.66 percent
D. 7.31 percent
E. 7.48 percent

52. Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These bonds have a \$1,000 face value, a 9 percent coupon, and pay interest semi-annually. The bonds are currently quoted at 87 percent of face value. What is the company's pre-tax cost of debt if the tax rate is 38 percent?
A. 4.10 percent
B. 4.42 percent
C. 6.61 percent
D. 8.90 percent
E. 10.67 percent

53. The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon. What is the firm's aftertax cost of debt if the tax rate is 30 percent?
A. 4.88 percent
B. 5.36 percent
C. 5.45 percent
D. 6.11 percent
E. 8.74 percent

54. The outstanding bonds of Tech Express are priced at \$989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 39 percent. What is the firm's aftertax cost of debt?
A. 3.01 percent
B. 3.22 percent
C. 3.35 percent
D. 3.77 percent
E. 4.41 percent

55. Simple Foods has a zero coupon bond issue outstanding that matures in 9 years. The bonds are selling at 42 percent of par value. What is the company's aftertax cost of debt if the tax rate is 38 percent?
A. 5.48 percent
B. 5.73 percent
C. 6.12 percent
D. 7.73 percent
E. 9.88 percent

56. Grill Works and More has 8 percent preferred stock outstanding that is currently selling for \$49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock?
A. 14.77 percent
B. 15.29 percent
C. 15.67 percent
D. 16.33 percent
E. 16.54 percent

57. Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of \$52 and a book value per share of \$38. What is the cost of preferred stock?
A. 7.50 percent
B. 13.88 percent
C. 14.42 percent
D. 19.29 percent
E. 19.74 percent

58. New York Deli's has 7 percent preferred stock outstanding that sells for \$36 a share. This stock was originally issued at \$50 per share. What is the cost of preferred stock?
A. 13.68 percent
B. 14.00 percent
C. 14.29 percent
D. 19.44 percent
E. 19.80 percent

59. Nelson's Landscaping has 1,200 bonds outstanding that are selling for \$990 each. The company also has 2,500 shares of preferred stock at a market price of \$28 a share. The common stock is priced at \$37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?
A. 43.08 percent
B. 45.16 percent
C. 47.11 percent
D. 54.00 percent
E. 55.45 percent

60. Mangrove Fruit Farms has a \$200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of \$35 a share compared to a price of \$24 a share for the common stock. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital?
A. 6.75 percent
B. 7.20 percent
C. 7.75 percent
D. 8.30 percent
E. 8.80 percent

61. Electronics Galore has 950,000 shares of common stock outstanding at a market price of \$38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital?
A. 42 percent
B. 46 percent
C. 50 percent
D. 54 percent
E. 58 percent

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Tutorial # 00005108 Posted By: spqr Posted on: 12/13/2013 10:24 PM
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