Financial management 3771 test 2

Multiple Choice Questions

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Question 1(5 points)

Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?

Question 1 options:

	A) $11,220
	B) $29,920
	C) $38,720
	D) $46,480

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Question 2(5 points)

Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $87,000. What will the accumulated depreciation be at the end of year three?

MACRS Five Year Property

Year Rate

1 20%

2 32%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Question 2 options:

	A) $13,520
	B) . $25,056
	C) . $38,241
	D) $61,944

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Question 3(5 points)

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

Question 3 options:

	A) $13.75
	B) $14.01
	C) $14.56
	D) $14.79

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Question 4(5 points)

You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why?

Year Project A Project B
0 -$50,000 -$50,000
1 24,000 41,000
2 36,200 20,000

3 21,000 10,000

Question 4 options:

	A) project A; because it has the higher required rate of return
	B) project A; because its NPV is about $4,900 more than the NPV of project B
	C) project B; because it has the largest total cash inflow
	D) project B; because it has the largest cash inflow in year one

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Question 5(5 points)

A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

Question 5 options:

	A) -$311.02
	B) $2,168.02
	C) $4,650.11
	D) $9,188.98

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Question 6(5 points)

. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

Year Project A Project B

0 -$80,000 - $80,000

1 32,000 0

2 32,000 0

3 32,000 105,000

Question 6 options:

	A) accept project A as it always has the higher NPV
	B) accept project B as it always has the higher NPV
	C) accept A at 8.5 percent and B at 13 percent
	D) accept B at 8.5 percent and neither at 13 percent

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Question 7(5 points)

You own some equipment that you purchased 4 years ago at a cost of $216,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $75,500. Which one of the following statements is correct if your tax rate is 35 percent?
MACRS Five Year Property

Year Rate

1 20%

2 32%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

Question 7 options:

	A) The tax due on the sale is $26,425.
	B) The book value today is $178,675.20
	C) The accumulated depreciation to date is $37,324.80.
	D) The aftertax salvage value is $62,138.68.

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Question 8(5 points)

How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return?

Question 8 options:

	A) $8.29
	B) $8.33
	C) $8.47
	D) $8.53

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Question 9(5 points)

What is the net present value of a project with the following cash flows if the required rate of return is 12 percent?
Year Cash Flow
0 -42,398

1 13,407

2 21,219

3 17,800

Question 9 options:

	A) -$1,574.41
	B) -$1,208.19
	C) -$842.12
	D) $729.09

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Question 10(5 points)

Miller Brothers Hardware paid an annual dividend of $1.15 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 12 percent rate of return, how much are you willing to pay to purchase one share of this stock today?

Question 10 options:

	A) $12.23
	B) $12.55
	C) $12.67
	D) $12.72

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Question 11 (10 points) Question 11 Unsaved

Stock valuation is extremely difficult. Why? Be sure to discuss risk issues, cash flow and dividends.

Question 11 options:

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Question 12 (10 points) Question 12 Unsaved

What are the strengths and weaknesses of the pay back method of investment evaluation? How does risk fit into looking at the pay back approach?

Question 12 options:

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Question 13 (10 points) Question 13 Unsaved

Why is the average accounting return approach considered flawed? Does it have any strengths?

Question 13 options:

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Question 14 (10 points) Question 14 Unsaved

What are the strengths and weaknesses of the internal rate of return method of evaluating investments?

Question 14 options:

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Question 15 (10 points) Question 15 Unsaved

What are the strengths and weaknesses of the Net Present Value approach to evaluating investments. Why is considered better than the internal rate of return method?

Question 15 options: