FI410 Exam 2

Liberty Services is now at the end of the final year of a project. The equipment originally cost $10,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale. a. $4,650 b. $4,511 c. $5,348 d. $5,301 e. $3,860

a. $4,650

As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow? Sales revenues $13,600 Depreciation $4,000 Other operating costs $6,000 Tax rate 35.0% a. $6,340 b. $5,896 c. $7,671 d. $5,579 e. $7,481

a. $6,340

Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 Cash flows -$300 $150 $200 $300 a. 1.75 years b. 1.89 years c. 2.08 years d. 1.51 years e. 1.56 years

a. 1.75 years

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $50.00 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? a. 10.79% b. 12.73% c. 10.68% d. 9.28% e. 13.38%

a. 10.79%

Based on the CAPM, what is the firm's cost of equity? a. 13.60% b. 15.64% c. 16.73% d. 11.56% e. 10.20%

a. 13.60%

Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 8.75% Year 0 1 2 3 Cash flows -$1,000 $450 $450 $450 a. 13.74% b. 11.41% c. 14.16% d. 12.23% e. 16.90%

a. 13.74%

A company's perpetual preferred stock currently sells for $115.00 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock? a. 7.32% b. 5.93% c. 6.08% d. 6.00% e. 7.18%

a. 7.32%

Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,075.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is its WACC? a. 8.74% b. 8.13% c. 7.52% d. 9.18% e. 9.53%

a. 8.74%

You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.00%. The firm will not be issuing any new stock. What is its WACC? a. 9.38% b. 11.44% c. 9.19% d. 7.22% e. 10.22%

a. 9.38%

Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)? a. A sharp increase in its forecasted sales. b. A sharp reduction in its forecasted sales. c. The company reduces its dividend payout ratio. d. The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. e. The company discovers that it has excess capacity in its fixed assets.

a. A sharp increase in its forecasted sales.

Which of the following statements is CORRECT? a. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR. b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR. c. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate. d. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period. e. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

a. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

Which of the following statements is CORRECT? a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM. d. If a company's beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock. e. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.

a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 9.75% Year 0 1 2 3 4 Cash flows -$1,200 $400 $425 $450 $475 a. $153.64 b. $185.11 c. $188.81 d. $183.26 e. $170.30

b. $185.11

Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 Cash flows -$825 $450 $460 $470 a. $396.72 b. $317.37 c. $336.42 d. $323.72 e. $257.07

b. $317.37

Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, i.e., no conflict will exist. WACC: 8.00% 0 1 2 3 4 CFS -$1,025 $650 $450 $250 $50 CFL -$1,025 $100 $300 $500 $700 a. $32.61 b. $38.37 c. $42.59 d. $40.29 e. $44.89

b. $38.37

Eakins Inc.'s common stock currently sells for $55.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. By how much would the cost of new stock exceed the cost of retained earnings? a. 0.21% b. 0.30% c. 0.37% d. 0.24% e. 0.27%

b. 0.30%

What is the best estimate of the firm's WACC? a. 11.92% b. 11.25% c. 11.81% d. 12.48% e. 8.89%

b. 11.25%

Which of the following is the best estimate for the weight of debt for use in calculating the WACC? a. 29.34% b. 23.47% c. 28.87% d. 25.11% e. 20.42%

b. 23.47%

Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? a. 4.81% b. 4.49% c. 4.31% d. 5.48% e. 5.30%

b. 4.49%

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from retained earnings? a. 6.02% b. 7.09% c. 5.95% d. 6.24% e. 5.88%

b. 7.09%

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? a. A project's IRR increases as the WACC declines. b. A project's NPV increases as the WACC declines. c. A project's MIRR is unaffected by changes in the WACC. d. A project's regular payback increases as the WACC declines. e. A project's discounted payback increases as the WACC declines.

b. A project's NPV increases as the WACC declines.

Which of the following assumptions is embodied in the AFN equation? a. All balance sheet accounts are tied directly to sales. b. Accounts payable and accruals are tied directly to sales. c. Common stock and long-term debt are tied directly to sales. d. Fixed assets, but not current assets, are tied directly to sales. e. Last year's total assets were not optimal for last year's sales

b. Accounts payable and accruals are tied directly to sales.

Which of the following statements is CORRECT? a. An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline. c. The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. d. Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. e. Identifying an externality can never lead to an increase in the calculated NPV.

b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline.

The term "additional funds needed (AFN)" is generally defined as follows: a. Funds that are obtained automatically from routine business transactions. b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations. c. The amount of assets required per dollar of sales. d. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth. e. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.

Which of the following statements is CORRECT? a. The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. c. If a project's payback is positive, then the project should be accepted because it must have a positive NPV. d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. e. One drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback.

b. One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period.

Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? a. Project A, which has average risk and an IRR = 9%. b. Project B, which has below-average risk and an IRR = 8.5%. c. Project C, which has above-average risk and an IRR = 11%. d. Without information about the projects' NPVs we cannot determine which one or ones should be accepted. e. All of these projects should be accepted as they will produce a positive NPV.

b. Project B, which has below-average risk and an IRR = 8.5%.

A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase? a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. b. The company increases its dividend payout ratio. c. The company begins to pay employees monthly rather than weekly. d. The company's profit margin increases. e. The company decides to stop taking discounts on purchased materials.

b. The company increases its dividend payout ratio.

Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV? Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost. WACC: 6.25% 0 1 2 3 4 CFS -$1,100 $550 $600 $100 $100 CFL -$2,700 $650 $725 $800 $1,400 a. $200.16 b. $170.97 c. $208.50 d. $185.57 e. $241.86

c. $208.50

Chua Chang & Wu Inc. is planning its operations for next year, and the CEO wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Last yr's sales = S0 $200,000 Last yr's accounts payable $50,000 Sales growth rate = g 40% Last yr's notes payable $15,000 Last yr's total assets = A * $145,000 Last year's accruals $20,000 Last yr's profit margin = PM a. -$9,000 b. -$13,560 c. -$12,000 d. -$13,800 e. -$14,760

c. -$12,000

Which of the following statements is CORRECT? a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project's NPV. e. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores.

c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. b. The lower the WACC used to calculate it, the lower the calculated NPV will be. c. If a project's NPV is less than zero, then its IRR must be less than the WACC. d. If a project's NPV is greater than zero, then its IRR must be less than zero. e. The NPV of a relatively low-risk project should be found using a relatively high WACC.

c. If a project's NPV is less than zero, then its IRR must be less than the WACC.

Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.55 and will generate an expected return of 5%. The firm currently has a required return of 10.75% and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If rRF is 0.25% and the market risk premium is 10%, should the firm undertake the investment? a. Yes; the beta of the asset will reduce the risk of the firm. b. No; the expected return of the asset is less than the firm's required return, which is 10.75%. c. No; the expected return of the asset (5%) is less than the required return (5.53%). d. No; the risk of the asset (beta) will increase the firm's beta. e. Yes; the expected return of the asset (5%) exceeds the required return (4.5%).

c. No; the expected return of the asset (5%) is less than the required return (5.53%).

Wilson Co. is considering two mutually exclusive projects. Both require an initial investment of $10,750, and their risks are average for the firm. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $8,785 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $4,750 at the end of each of the next 4 years. The firm's WACC is 10.6%. Determine the equivalent annual annuity of the most profitable project. a. $1,419.70 b. $1,630.03 c. $1,156.79 d. $1,314.54 e. $1,130.50

d. $1,314.54

Clayton Industries is planning its operations for next year. Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last yr's sales = S0 $350 Last yr's accounts payable $40 Sales growth rate = g 30% Last yr's notes payable $50 Last yr's total assets = A * $580 Last yr's accruals $30 Last yr's prof margin = PM 5% Target payout ratio 60% a. $120.9 b. $139.6 c. $130.9 d. $143.9 e. $175.6

d. $143.9

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Risk-adjusted WACC 10.0% Net investment cost (depreciable basis) $65,000 Straight-line depr. rate 33.3333% Sales revenues, each year $63,500 Annual operating costs (excl. depr.) $25,000 Tax rate 35.0% a. $12,551 b. $12,712 c. $12,069 d. $16,092 e. $14,000

d. $16,092

Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00% Year 0 1 2 3 Cash flows -$1,000 $500 $500 $500 a. 2.80 years b. 1.91 years c. 2.09 years d. 2.35 years e. 2.26 years

d. 2.35 years

Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets Current assets $38,000,000 Net plant, property, and equipment $101,000,000 Total assets $139,000,000 Liabilities and Equity Accounts payable $10,000,000 Accruals $9,000,000 Current liabilities $19,000,000 Long-term debt (40,000 bonds, $1,000 par value) $40,000,000 Total liabilities $59,000,000 Common stock (10,000,000 shares) $30,000,000 Retained earnings $50,000,000 Total shareholders' equity $80,000,000 Total liabilities and shareholders' equity $139,000,000 The stock is currently selling for $15.00 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $1,150.00. The beta is 1.35, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. What is the best estimate of the after-tax cost of debt? a. 4.15% b. 4.47% c. 4.11% d. 3.57% e. 3.65%

d. 3.57%

Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows -$9,000 $2,000 $2,025 $2,050 $2,075 $2,100 a. 3.52% b. 3.34% c. 4.68% d. 4.46% e. 3.39%

d. 4.46%

You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 13.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? a. 11.20% b. 9.99% c. 9.16% d. 9.25% e. 9.44%

d. 9.25%

Spontaneously generated funds are generally defined as follows: a. Assets required per dollar of sales. b. A forecasting approach in which the forecasted percentage of sales for each item is held constant. c. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock. d. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals. e. The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.

d. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals.

Which of the following statements is CORRECT? a. A change in a company's target capital structure cannot affect its WACC. b. WACC calculations should be based on the before-tax costs of all the individual capital components. c. Flotation costs associated with issuing new common stock normally reduce the WACC. d. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline. e. An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.

d. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will decline.

Sunshine Inc. has two equally-sized divisions. Division A has a beta of 0.8 and Division B has a beta of 1.2. The company is 100% equity financed. The risk-free rate is 6% and the market risk premium is 5%. Sunshine assigns different hurdle rates to each division based on each division's market risk. Which of the following statements is CORRECT? a. Sunshine's composite WACC is 10%. b. Division B has a lower WACC than Division A. c. If the same WACC is used for each division, the firm would select too many Division A projects and reject too many Division B projects. d. If the same WACC is used for each division, the firm would select too many Division B projects and reject too many Division A projects. e. Sunshine's composite WACC is 12%.

d. If the same WACC is used for each division, the firm would select too many Division B projects and reject too many Division A projects.

Which of the following statements is CORRECT? a. The WACC as used in capital budgeting is an estimate of a company's before-tax cost of capital. b. The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt. c. The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets. d. There is an "opportunity cost" associated with using retained earnings, hence they are not "free." e. The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year.

d. There is an "opportunity cost" associated with using retained earnings, hence they are not "free."

If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely a. become riskier over time, but its intrinsic value will be maximized. b. become less risky over time, and this will maximize its intrinsic value. c. accept too many low-risk projects and too few high-risk projects. d. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized. e. continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

d. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow? Equipment cost (depreciable basis) $77,000 Straight-line depreciation rate 33.333% Sales revenues, each year $60,000 Operating costs (excl. depr.) $25,000 Tax rate 35.0% a. $23,800 b. $34,272 c. $36,493 d. $31,099 e. $31,733

e. $31,733

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000, and their risks are average for the firm. Project X has an expected life of 2 years with after-tax cash inflows of $5,300 and $7,000 at the end of Years 1 and 2, respectively. Project Y has an expected life of 4 years with after-tax cash inflows of $3,500 at the end of each of the next 4 years. The firm's WACC is 12%. Use the replacement chain to determine the NPV of the most profitable project. a. $529.81 b. $706.41 c. $573.96 d. $750.56 e. $630.72

e. $630.72

Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 32.50%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted? a. 0.44% b. 0.54% c. 0.43% d. 0.57% e. 0.53%

e. 0.53%

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.15. Based on the CAPM approach, what is the cost of equity from retained earnings? a. 7.60% b. 8.62% c. 12.67% d. 12.27% e. 10.14%

e. 10.14%

Datta Computer Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 Cash flows -$975 $450 $470 $490 a. 17.55% b. 15.69% c. 21.67% d. 16.72% e. 20.64%

e. 20.64%

Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 4 Cash flows -$1,175 $300 $320 $340 $360 a. 7.65% b. 6.12% c. 5.13% d. 7.72% e. 6.66%

e. 6.66%

Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company's outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is $0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $19.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? a. 8.68% b. 7.93% c. 7.78% d. 8.76% e. 7.48%

e. 7.48%

Which of the following statements is CORRECT? a. If a project has "normal" cash flows, then its IRR must be positive. b. If a project has "normal" cash flows, then its MIRR must be positive. c. If a project has "normal" cash flows, then it will have exactly two real IRRs. d. The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life. e. If a project has "normal" cash flows, then it can have only one real IRR

e. If a project has "normal" cash flows, then it can have only one real IRR

Westchester Corp. is considering two equally risky, mutually exclusive projects, both of which have normal cash flows. Project A has an IRR of 11%, while Project B's IRR is 14%. When the WACC is 8%, the projects have the same NPV. Given this information, which of the following statements is CORRECT? a. If the WACC is 13%, Project A's NPV will be higher than Project B's. b. If the WACC is 9%, Project A's NPV will be higher than Project B's. c. If the WACC is 6%, Project B's NPV will be higher than Project A's. d. If the WACC is greater than 14%, Project A's IRR will exceed Project B's. e. If the WACC is 9%, Project B's NPV will be higher than Project A's.

e. If the WACC is 9%, Project B's NPV will be higher than Project A's.

Which of the following statements is CORRECT? a. One defect of the IRR method is that it does not take account of cash flows over a project's full life. b. One defect of the IRR method is that it does not take account of the time value of money. c. One defect of the IRR method is that it does not take account of the cost of capital. d. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until some time in the future. e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Which of the following statements is CORRECT? a. One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life. b. One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. c. One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. d. One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until some time in the future. e. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

e. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.

Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project? a. Changes in net operating working capital. b. Shipping and installation costs for machinery acquired. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes.

e. Sunk costs that have been expensed for tax purposes.

Which of the following statements is CORRECT? a. The WACC is calculated using before-tax costs for all components. b. The after-tax cost of debt usually exceeds the after-tax cost of equity. c. For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock. d. Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year. e. The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.

e. The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.