finance final
TJ Co stock has a beta of 1.56, the current risk-free rate is 5.86 percent, and the expected return on the market is 14.11 percent. What is TJ Co's cost of equity? Multiple Choice 27.87% 21.53% 18.73% 31.15%
18.73%
Your Company is considering a new project that will require $21,000 of new equipment at the start of the project. The equipment will have a depreciable life of 6 years and will be depreciated to a book value of $4,800 using straight-line depreciation. The cost of capital is 8%, and the firm's tax rate is 21%. Estimate the present value of the tax benefits from depreciation. Multiple Choice $2,700 $567 $2,621 $2,133
2,621
Over how many tax years will a 3-year asset be depreciated given the half-year convention? Multiple choice question. 5 years 3 years 4 years 2 years
4 years
A firm has a capital structure of 40% common stock, 10% preferred stock, and 50% debt. A new project is being internally funded. What weight should be used for equity in the project WACC? Multiple choice question. 40% $30,000/($30,000 + $40,000), or 43% 50% $30,000/$40,000, of 75%
40%
Why must the cost of debt be adjusted for taxes? Multiple choice question. Because interest on debt is tax deductible which lowers the firm's total cost of debt financing Because interest payments on bonds are paid with after-tax profits All sources of external financing, including the cost of debt, are adjusted for taxes The cost of debt should not be adjusted for taxes.
Because interest on debt is tax deductible which lowers the firm's total cost of debt financing
Which one of these is a correct formula for OCF, assuming there is no interest expense? Multiple choice question. Net income + Depreciation Net income - Depreciation Net income - Taxes + Depreciation Net income + Taxes
Net income + Depreciation
What are flotation costs? Multiple choice question. Fees paid to investment banks for issuing new securities Costs associated with computing divisional betas Costs incurred when new projects are funded with retained earnings Interest paid on new debt securities
Fees paid to investment banks for issuing new securities
Which one of these is a correct formula for OCF, assuming there is no interest expense? Multiple choice question. Net income + Depreciation Net income + Taxes Net income - Taxes + Depreciation Net income - Depreciation
Net income + Depreciation
An asset is 5-year MACRS property and has an initial cost of $64,200. The MACRS percentages are: 20, 32, 19.2, 11.52, 11.52, and 5.76 percent for years 1 to 6, respectively. What is the book value at the end of year 4? Multiple choice question. $11,093.76 $7,395.84 $8,308.14 $3,697.92
$11,093.76
Select all that apply A project requires $15,000 of net working capital throughout its 5-year life. How is this requirement handled in project analysis? Select all that apply. Multiple select question. $15,000 is a cash inflow in year 5. $15,000 is a cash outflow in year 5. $15,000 is a cash inflow at time zero. $15,000 is a cash outflow at time zero.
$15,000 is a cash inflow in year 5. $15,000 is a cash outflow at time zero.
An asset has a depreciable basis of $13,200 and qualifies as 3-year MACRS property. The MACRS percentages are: 16.67, 33.33, 33.33. and 16.67 percent for years 1 to 4, respectively. What is the year 3 ending book value?
$2,200.44
An asset has a depreciable basis of $13,200 and qualifies as 3-year MACRS property. The MACRS percentages are: 16.67, 33.33, 33.33. and 16.67 percent for years 1 to 4, respectively. What is the year 3 ending book value? Multiple choice question. $0 $1,209.57 $815.03 $2,200.44
$2,200.44
Your firm needs a machine which costs $290,000, and requires $44,000 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 21% and a discount rate of 12%. If this machine can be sold for $29,000 at the end of year 3, what is the after tax salvage value? Multiple Choice $27,422.69 $7,511.00 $22,910.00 $16,976
$22,910.00
A firm has a capital structure of 40 percent common stock, 10 percent preferred stock, and 50 percent debt. A new project is being funded with $40,000 of debt and $30,000 of common stock. What weight should be used for equity in the project WACC? Multiple choice question. $30,000/($30,000 + $40,000), or 43 percent 50 percent $30,000/$40,000, of 75 percent 40 percent
$30,000/($30,000 + $40,000), or 43 percent
McGinty's purchased a new machine for $318,000, paid $19,000 in sales tax, and $7,500 in delivery charges. The firm paid $3,400 to have the machine calibrated once it was set in place. The machine requires $5,600 of annual maintenance. What is the depreciable basis of the machine? Multiple choice question. $344,500 $340,400 $353,500 $347,900
$347,900 Cost of New Machine = $318,000 Add: Sales tax = $19,000 Add: Delivery charges = $7,500 Add: Installation charges = $3,400 Total Depreciable basis of new Machine=$318,000+$19,000+$7,500+$3,400=$347,900 Total Depreciable basis of New Machine is $347,900
Assume the initial costs of a project, CF0, are $38,000 and the weighted average flotation cost, fA, is 6.7 percent. How is the flotation-adjusted CF0 computed? Multiple choice question. $38,000 × (1 - 0.067) $38,000 × (1 + 0.067) $38,000/(1 + 0.067) $38,000/(1 - 0.067)
$38,000/(1 - 0.067)
Select all that apply A new project requires $24,000 of equipment which will be depreciated straight-line to zero over the project's 4-year life. The project requires $2,400 of NWC, the annual OCF is $16,000, and the tax rate is 35 percent. The equipment's market value at the end of year 4 is $5,000. What cash flows occur in year 4? Select all that apply. Multiple select question. $2,400 $5,000 $5,000 × (1 - 0.35) $16,000 × (1 - TC)
$5,000 × (1 - 0.35) $2,400
Select all that apply A project has a 3-year life and requires equipment costing $34,000. The OCF is estimated at $16,000 annually. NWC of $3,500 is required over the project's life. What cash flows occur at time zero? Select all that apply. Multiple select question. $0 -$3,500 -$34,000 $16,000
-$3,500 -$34,000
The yield to maturity on a firm's bonds is 8.8 percent. What is the component cost of debt if the tax rate is 35 percent? Multiple choice question. 3.08 percent 8.8 percent 11.88 percent 5.72 percent
5.72 percent
The yield to maturity on a firm's bonds is 8.8 percent. What is the component cost of debt if the tax rate is 35 percent? Multiple choice question. 8.8 percent 11.88 percent 3.08 percent 5.72 percent
5.72 percent
IVY has preferred stock selling for 96.4 percent of par that pays a 8.6 percent annual coupon. What would be IVY's component cost of preferred stock? Multiple Choice 8.92% 8.29% 8.60% 30.96%
8.92% EX. FROM SIMILAR PROBLEM Cost of preferred stock = Annual coupon /Current priceAnnual coupon = par value x annual coupon rate=$100 x 7.5%=$7.50 per shareCurrent price = par value x 97.5%Current price = $100 x 97.5%=$97.50 per shareCost of preferred stock = Annual coupon /Current price=$7.50/$97.50=0.076923077=7.69 %=7.69 PercentNotes:Par value is assumed is $100
Your firm needs a machine which costs $210,000, and requires $36,000 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 21% and a discount rate of 15%. What is the depreciation tax shield for this project in year 3? Multiple Choice $24,570 $31,101 $4,665.15 $6,531.21
?
What is an incremental cash flow? Multiple choice question. A cash flow that either increases or decreases when a new project is implemented A cash flow that affects a firm's revenues A cash flow that increases when a new project is implemented A cash flow that changes when one more unit is produced
A cash flow that either increases or decreases when a new project is implemented
What does a firm-wide WACC represent? Multiple choice question. The current yield on a firm's outstanding debt A firm's expected return on its investments A firm's overall cost of financing A firm's overall rate of return
A firm's overall cost of financing
What does a firm-wide WACC represent? Multiple choice question. The current yield on a firm's outstanding debt A firm's overall cost of financing A firm's overall rate of return A firm's expected return on its investments
A firm's overall cost of financing
Select all that apply Which of these illustrates a complementary effect? Select all that apply. Multiple select question. A new product increases traffic flow thereby increasing the revenue generated by a firm's existing products A decrease in the overall level of sales of existing products caused by the introduction of a new product A new product increases the sales of one of the firm's existing products Customers buy the new product rather than an existing product
A new product increases traffic flow thereby increasing the revenue generated by a firm's existing products A new product increases the sales of one of the firm's existing products
The half-year convention is based on which of these assumptions? Multiple choice question. All assets placed in service during a given period were placed in service at the mid-point of the period. Any asset purchased during a given period is assumed to be only half paid for during that period. 50 percent of the assets are acquired on the first day and the other 50 percent are acquired on the last day of a given period. Any asset placed in service during a given period is assumed to be placed in service on the last day of the given period.
All assets placed in service during a given period were placed in service at the mid-point of the period.
Which of the following is most correct? Multiple Choice When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons. Firms should use historical costs rather than marginal costs of capital. An increase in the risk-free rate will increase the cost of equity. All of these choices are correct.
An increase in the risk-free rate will increase the cost of equity.
Which one of these represents an opportunity cost? Multiple choice question. Conducting market research to determine if a new product is feasible Assigning a current employee to a new project Hiring a new employee for a recently approved project Buying some new equipment for use in a new project
Assigning a current employee to a new project
Applying the firmwide WACC to all projects results in accepting -risk projects and rejecting -risk projects. This will the firmwide risk over time.
Blank 1: high Blank 2: low Blank 3: increase or raise
How is bond interest included in the analysis of a new project? Multiple choice question. Bond interest is ignored when analyzing a new project because it is a financing expense. Bond interest is included in the computation of a bond's yield to maturity, which is the pretax cost of debt used to compute a project's WACC Bond interest is added as an expense on the project's pro forma income statement Bond interest increases the amount of net working capital required for a project and is treated as a cash outflow for the project
Bond interest is included in the computation of a bond's yield to maturity, which is the pretax cost of debt used to compute a project's WACC
Select all that apply Which of these represent opportunity costs? Select all that apply. Multiple select question. The research and development costs related to a new project Building a new building on a vacant lot owned by the firm Using a current employee who is about to be laid off to run a project on a day by day basis Using a piece of company equipment that has been sitting idle for two years in a new project
Building a new building on a vacant lot owned by the firm Using a current employee who is about to be laid off to run a project on a day by day basis Using a piece of company equipment that has been sitting idle for two years in a new project
How can a replacement problem be defined? Multiple choice question. Selling an asset that a firm is currently utilizing Selling an asset while it still has a positive book value Buying a new asset to replace an asset that is fully depreciated and no longer usable Buying a new asset which will be used in place of an existing asset that is still usable
Buying a new asset which will be used in place of an existing asset that is still usable
How is free cash flow defined? Multiple choice question. Cash flow arising from external sources. Cash flow above that which is expected from a new project. Cash flow that avoids taxation. Cash flow available for distribution to a firm's investors.
Cash flow available for distribution to a firm's investors.
Financial risk refers to which one of these? Multiple choice question. Risks arising from a project's line of business Capital structure decisions Variability of a firm's cash flows Risk associated with a project's operations
Capital structure decisions
For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity? Multiple Choice Choosing between projects with differing risks Choosing between independent projects Choosing between alternative assets with differing lives Choosing between alternative assets with equal lives
Choosing between alternative assets with differing lives
Assume a firm takes on a new project that is much riskier than the firm's existing projects. Which party disproportionately bears this new risk? Multiple choice question. Parties who financed the new project Bondholders Preferred stockholders Common stockholders
Common stockholders
Assume a firm takes on a new project that is much riskier than the firm's existing projects. Which party disproportionately bears this new risk? Multiple choice question. Preferred stockholders Bondholders Common stockholders Parties who financed the new project
Common stockholders
Which of these inputs should be project-specific when computing a project WACC? Multiple choice question. Cost of equity, preferred, and debt Cost of preferred Cost of equity Cost of debt
Cost of equity
Which variable most needs adjusting when revising a firmwide WACC into a divisional WACC? Multiple choice question. Cost of equity, iE Weights Tax rate, TC Cost of debt, iD
Cost of equity, iE
Which of these are cash flows that apply to a replacement problem? Select all that apply.
Cost of new asset ATCF of an existing asset at its normal life-end Depreciation lost if existing asset is sold
Which one of these is an example of the substitution effect? Multiple choice question. Telling a customer that either one of two existing products will meet their need The variable costs of a firm's existing product increases due to a new product requiring the same resources Hiring Joe rather than Larry to oversee a new project Current employee costs are lowered due to the automation processes implemented by a new project
Current employee costs are lowered due to the automation processes implemented by a new project
What does accelerated depreciation indicate? Multiple choice question. Depreciation of an asset is done evenly over the asset's life with an entire year's worth deducted in year 1. Depreciation in the first half of an asset's life is greater than half of the assets value. Depreciation is taken for an entire 12-month period during the first year. Depreciation of an asset is completed within the first year.
Depreciation in the first half of an asset's life is greater than half of the assets value.
How is operating cash flow (OCF) defined? Multiple choice question. (EBIT + Depreciation)(1 - Tax rate) EBIT (1 - Tax rate) + Depreciation EBIT (Tax rate) + Depreciation EBIT - Taxes
EBIT (1 - Tax rate) + Depreciation
Bill's Boards has 6.6 million shares of common stock outstanding, 5.6 million shares of preferred stock outstanding, and 36.00 thousand bonds. If the common shares are selling for $29.70 per share, the preferred share are selling for $18.60 per share, and the bonds are selling for 95.84 percent of par, what would be the weight used for common stock in the computation of Bill's WACC? Multiple Choice 66.67% 53.94% 33.33% 58.57%
EX Weight used for WACC computation is based on market values of debt, common and preferred equity. Market value of common equity = 6.5 mil * $29.60 = 192,400,000 Market value of preferred equity = 5.5 mil * $18.50 = 101,750,000 Market value of debt (assuming par value of $1000, hence market price is 958.50) = 35,000 * 958.80 = 33,547,500 Weight of common equity = 192,400,00/(192,400,000 + 101,750,000 + 33,547,500) = 58.71% ANSWER IS 58.57
Bill's Boards has 6.6 million shares of common stock outstanding, 5.6 million shares of preferred stock outstanding, and 36.00 thousand bonds. If the common shares are selling for $29.70 per share, the preferred share are selling for $18.60 per share, and the bonds are selling for 95.84 percent of par, what would be the weight used for common stock in the computation of Bill's WACC? Multiple Choice 66.67% 53.94% 33.33% 58.57%
EX FROM SIMILAR PROBLEM" Weight used for WACC computation is based on market values of debt, common and preferred equity. Market value of common equity = 6.5 mil * $29.60 = 192,400,000 Market value of preferred equity = 5.5 mil * $18.50 = 101,750,000 Market value of debt (assuming par value of $1000, hence market price is 958.50) = 35,000 * 958.80 = 33,547,500 Weight of common equity = 192,400,00/(192,400,000 + 101,750,000 + 33,547,500) = 58.71%
What is the primary advantage of the subjective approach to divisional WACCs? Multiple choice question. Ease of implementation with some acknowledgment of risk variations A firm in a similar line of business as each division is found so divisional proxy betas can be determined Betas are computed for each division increasing the accuracy of WACC Incorrect accept/reject decisions are eliminated
Ease of implementation with some acknowledgment of risk variations
When computing a divisional WACC, a proxy value is needed for which one of these? Multiple choice question. Equity risk Market rate of return Tax rate Annual dividends
Equity risk
What is pro forma analysis? Multiple choice question. Estimation of future project cash flows using only the relevant parts of the financial statements Ascertaining how an action would affect a firm's taxes Comparing the financial statements from one time period to another Reviewing historical data to determine trends
Estimation of future project cash flows using only the relevant parts of the financial statements
Louis Enterprises stock is selling for $48 a share. Flotation cost on new equity issues is 15 percent. How is the value of F computed for use in the flotation-adjusted cost of equity formula? Multiple choice question. F = (1 - 0.15) × $48 F = 0.15 × $48 F = $48/(1 + 0.15) F = 1.15 × $48
F = 0.15 × $48
Which of these correctly define free cash flow? Select all that apply. Multiple select question. FCF = Net income - Change in gross fixed assets - Change in net operating working capital FCF = OCF - Investment in operating capital FCF = [EBIT(1 - Tax rate) + Depreciation] - [Change in gross fixed assets + Change in net operating working capital] FCF = EBIT + Depreciation - Taxes
FCF = OCF - Investment in operating capital FCF = [EBIT(1 - Tax rate) + Depreciation] - [Change in gross fixed assets + Change in net operating working capital]
How are the dividends paid on stock included in the analysis of a new project? Multiple choice question. Financing costs, such as dividends, are considered in the component costs of capital when a project's WACC is calculated. They are not included because stock dividends are a financing cost. Dividends are included as an expense in the project's pro forma income statement. Dividends are treated as a cash outflow for the time period in which they are paid.
Financing costs, such as dividends, are considered in the component costs of capital when a project's WACC is calculated.
What are the key differences between the free cash flows of a firm and those of a project? Select all that apply. Multiple choice question. Firm free cash flows ignore depreciation expense while project free cash flows include depreciation. Firm free cash flows consider the effects of taxes while project free cash flows ignore tax effects. Firm free cash flows are computed using a subset of a firm's pro forma statements while project free cash flows use the entire financial statements. Firm free cash flows are actual values while project free cash flows are estimates.
Firm free cash flows are actual values while project free cash flows are estimates.
In proforma analysis, what determines whether or not an account on the balance sheet or income statement is relevant to a project? Multiple choice question. If the project causes an account value to change, then it is relevant. If the account was listed on the latest financial statement, then it is relevant. Only income and variable expense accounts are relevant. Income statement accounts are all relevant but balance sheet accounts are not.
If the project causes an account value to change, then it is relevant.
In proforma analysis, what determines whether or not an account on the balance sheet or income statement is relevant to a project? Multiple choice question. Income statement accounts are all relevant but balance sheet accounts are not. If the account was listed on the latest financial statement, then it is relevant. Only income and variable expense accounts are relevant. If the project causes an account value to change, then it is relevant.
If the project causes an account value to change, then it is relevant.
Identify the results of using the firmwide WACC to evaluate all projects for decision-making? Multiple choice question. Firmwide investment decisions will be most accurate Incorrect acceptance of projects Firmwide risk may vary but maximum profit will be earned Incorrect rejection of projects
Incorrect acceptance of projects
Identify the results of using the firmwide WACC to evaluate all projects for decision-making? Multiple choice question. Firmwide risk may vary but maximum profit will be earned Incorrect acceptance of projects Incorrect rejection of projects Firmwide investment decisions will be most accurate
Incorrect acceptance of projects
Select all that apply Manor's purchases some equipment in preparation for a new project. Which of these are time zero cash flows for that project? Select all that apply. Multiple select question. Purchase price of the equipment Management's time spent in determining which equipment to purchase Installation and initial testing costs Shipping costs to have the equipment delivered
Installation and initial testing costs Purchase price of the equipment Shipping costs to have the equipment delivered
Select all that apply What types of costs are included in an asset's depreciable basis? Select all that apply. Multiple select question. Installation and testing costs Purchase price of the asset An adjustment downward to record the selling price of the asset replaced Sales tax and freight charges
Installation and testing costs Purchase price of the asset Sales tax and freight charges
Which of these activities will involve flotation costs? Select all that apply. Multiple select question. Issuing bonds to finance a new project Issuing new shares of stock to fund a firm's expansion Redeeming bonds prior to maturity Funding a project with retained earnings
Issuing bonds to finance a new project Issuing new shares of stock to fund a firm's expansion
Free cash flows for which one of the following are affected by estimation error? Multiple choice question. Firm free cash flows only Both firm and project free cash flows Neither firm nor project free cash flows Project free cash flows only
Project free cash flows only
Which one of these represents a time zero project cash flow? Multiple choice question. Sale of equipment at the end of the project Operator hired to run new equipment Annual maintenance on project equipment Purchase of new equipment to start a project
Purchase of new equipment to start a project
FlavR Co stock has a beta of 2.15, the current risk-free rate is 2.15 percent, and the expected return on the market is 9.15 percent. What is FlavR Co's cost of equity? Multiple Choice 21.82% 11.30% 13.45% 17.20%
Re = Rf + Beta*(Rm - Rf) Re = 2.15% + 2.15*(9.15% - 2.15%) = 17.2%
What is the key disadvantage of the subjective approach to divisional WACCs? Multiple choice question. More incorrect accept/reject decisions occur than when the firmwide WACC is applied Time required to gather necessary data The costs of preparing the WACCs tend to be higher than the benefits Reliance on a person, or persons, opinion and not on quantifiable information
Reliance on a person, or persons, opinion and not on quantifiable information
What is the key disadvantage of the subjective approach to divisional WACCs? Multiple choice question. Reliance on a person, or persons, opinion and not on quantifiable information More incorrect accept/reject decisions occur than when the firmwide WACC is applied Time required to gather necessary data The costs of preparing the WACCs tend to be higher than the benefits
Reliance on a person, or persons, opinion and not on quantifiable information
How do Section 179 deductions aid small businesses? Multiple choice question. Section 179 allows eligible property, up to stated limits, to be fully expensed in the year of purchase. Section 179 grants a tax credit, or dollar for dollar reduction in taxes, in an amount equal to the cost of the eligible property acquired. Section 179 allows depreciation deductions in excess of a firm's taxable income, thereby allowing firms to receive a tax refund of the excess amount. Section 179 allows firms established within the past 5 years to fully depreciate all asset purchases in the year of acquisition.
Section 179 allows eligible property, up to stated limits, to be fully expensed in the year of purchase.
Mike's Garage spent $1,000 last week to repair its parking lot. No matter what Mike does, he cannot recoup this expense for his business. What type of cost is this? Multiple choice question. Marginal cost Opportunity cost Incremental cost Sunk cost
Sunk cost
Which one of these represents a limit placed on Section 179 deductions? Multiple choice question. $2.5 million maximum cost of eligible property (for 2010) Maximum deduction of $2 million Taxable income from the active conduct of the firm Annual deduction cannot exceed a firm's retained earnings
Taxable income from the active conduct of the firm
How can you determine if a cash flow is incremental to a project? Select all that apply. Multiple select question. The cash flow is unaffected by a new project. The cash flow changes only when a new project is implemented. The cash flow will disappear when the project ceases. The cash flow occurs only if a new project is implemented.
The cash flow changes only when a new project is implemented. The cash flow will disappear when the project ceases.
Select all that apply How can you determine if a cash flow is incremental to a project? Select all that apply. Multiple select question. The cash flow occurs only if a new project is implemented. The cash flow changes only when a new project is implemented. The cash flow will disappear when the project ceases. The cash flow is unaffected by a new project.
The cash flow occurs only if a new project is implemented. The cash flow changes only when a new project is implemented. The cash flow will disappear when the project ceases.
Why are sunk costs excluded from project analysis? Multiple choice question. Sunk costs occur only after a project has been fully implemented. The costs have been incurred and cannot be recouped with or without the project. Sunk costs only occur if a project is rejected. Sunk costs are firmwide costs.
The costs have been incurred and cannot be recouped with or without the project.
What is the double-declining balance (DDB) method of depreciation? Multiple choice question. The depreciation is equal to twice the straight-line amount over the life of an asset. The depreciation rate is applied each year to the average of an asset's beginning and ending book values for the year. Depreciation for each year is equal to twice the straight-line amount until an asset is fully depreciated. The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value.
The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value.
What is the double-declining balance (DDB) method of depreciation? Multiple choice question. The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value. Depreciation for each year is equal to twice the straight-line amount until an asset is fully depreciated. The depreciation rate is applied each year to the average of an asset's beginning and ending book values for the year. The depreciation is equal to twice the straight-line amount over the life of an asset.
The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value.
Why are a firm's target capital structure values used in computing the average flotation cost? Multiple choice question. The market weights of a firm's capital structure are difficult to compute. The firm will issue securities in these percentages over the long term. The target capital structure accurately reflects the current levels of debt and equity. There is no real reason. It is just common practice.
The firm will issue securities in these percentages over the long term.
What condition must a new project meet if the project is to qualify to use the firm's WACC as the project's WACC? Multiple choice question. The new project must be less risky than the firm's existing projects. The new project must be very similar to the firm's existing projects. The new project must be riskier than the firm's existing projects. There must be no relationship between the new project and the firm's existing projects.
The new project must be very similar to the firm's existing projects.
What condition must a new project meet if the project is to qualify to use the firm's WACC as the project's WACC? Multiple choice question. There must be no relationship between the new project and the firm's existing projects. The new project must be very similar to the firm's existing projects. The new project must be riskier than the firm's existing projects. The new project must be less risky than the firm's existing projects.
The new project must be very similar to the firm's existing projects.
How is financial risk defined? Multiple choice question. The risk of a project related to the project's line of business The risk that a project's beta is incorrectly estimated The risk to equity holders if a company executive should steal all of the firm's cash The risk of a project to equity holders stemming from the use of debt
The risk of a project to equity holders stemming from the use of debt
How are flotation costs incorporated into the constant-growth formula for computing the cost of equity? Multiple choice question. They are added to the unadjusted cost of equity, iE. They are subtracted from the dividend amount. They are subtracted from the stock price. They are added to the growth rate.
They are subtracted from the stock price.
Select all that apply Which of these conditions generally occur in situations where equivalent annual cost (EAC) applies as the method of decision making? Select all that apply. Multiple select question. Both assets cost the same. Two assets can be used for the same purpose Both assets may produce the same level of sales. Both assets have the same projected life.
Two assets can be used for the same purpose Both assets may produce the same level of sales.
A firm funds its operations with $50 of common stock, $30 of preferred stock, and $40 of debt. The component costs are: common = 12 percent; preferred = 10 percent; pretax debt = 8 percent. Illustrate the WACC formula at a tax rate of 34 percent. Multiple choice question. WACC = ($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)(0.34) WACC =($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08) WACC = [($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)][1 - 0.34] WACC = ($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)(1 - 0.34)
WACC = ($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)(1 - 0.34)
A firm finances its operations with $500 of common stock and $300 of debt. The cost of equity is 13 percent and the after-tax cost of debt is 5 percent. Illustrate the WACC formula at a tax rate of 15 percent. Multiple choice question. WACC = ($500/$800)(0.13) + ($300/$800)(0.05) WACC = [($500/$800)(0.13) + ($300/$800)(0.05)][1 - 0.15} WACC = ($500/$800)(0.13) + ($300/$800)(0.05)(1 - 0.15) WACC cannot be computed as there is no information regarding preferred stock.
WACC = ($500/$800)(0.13) + ($300/$800)(0.05)
A firm finances its operations with $500 of common stock and $300 of debt. The cost of equity is 13 percent and the after-tax cost of debt is 5 percent. Illustrate the WACC formula at a tax rate of 15 percent. Multiple choice question. WACC = ($500/$800)(0.13) + ($300/$800)(0.05)(1 - 0.15) WACC cannot be computed as there is no information regarding preferred stock. WACC = [($500/$800)(0.13) + ($300/$800)(0.05)][1 - 0.15} WACC = ($500/$800)(0.13) + ($300/$800)(0.05)
WACC = ($500/$800)(0.13) + ($300/$800)(0.05)
Which one of these applies to the weighted-average cost of capital (WACC)? Multiple choice question. The tax adjustment applies to every component cost. WACC is an after-tax cost. The weights are based on the cost of each component. The weights are based on book values.
WACC is an after-tax cost.
Solar Shades has 8.1 million shares of common stock outstanding, 4.1 million shares of preferred stock outstanding, and 11 thousand bonds. If the common shares are selling for $13.10 per share, the preferred share are selling for $30.10 per share, and the bonds are selling for 104.99 percent of par, what would be the weight used for common stock in the computation of Solar Shade's WACC? Multiple Choice 33.33% 66.67% 44.02% 66.33%
Weighted Average Cost of Capital = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity + Weight of Preferred Stock* Cost of Preferred Stock ANSWER:44.02%
Which one of these is a key assumption in situations where EAC is used as the decision method? Multiple choice question. Whenever the chosen asset wears out, it will be replaced with an identical asset. Whenever the chosen asset wears out, it will not be replaced. Whenever the chosen asset wears out, it will be replaced with the alternative asset. Whenever the chosen asset wears out, the project will double in size and two assets will be required as replacements.
Whenever the chosen asset wears out, it will be replaced with an identical asset.
Which of these questions need to be answered when determining a project's WACC? Select all that apply. Multiple select question. What is the expected life of the project? How much will the project cost both to implement and to manage? Which inputs should be project-specific and which should be firmwide values? How does the risk level of the project compare to the overall risk level of the firm?
Which inputs should be project-specific and which should be firmwide values? How does the risk level of the project compare to the overall risk level of the firm?
Which of these values represents the pretax cost of debt? Multiple choice question. Dividend yield Yield to maturity Coupon rate Current yield
Yield to maturity
If you add all the cash flows related to net working capital (NWC) over a project's life, what sum must you obtain if your cash flows are correct? Multiple choice question. An amount equal to CF0 An amount equal to the highest NWC requirement for any one year Zero An amount equal to the initial NWC requirement
Zero
If you add all the cash flows related to net working capital (NWC) over a project's life, what sum must you obtain if your cash flows are correct? Multiple choice question. An amount equal to the initial NWC requirement An amount equal to the highest NWC requirement for any one year Zero An amount equal to CF0
Zero
When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as Multiple Choice a simple average of the capital components costs. a sum of the capital components costs. a weighted average of the capital components costs. they apply to each asset as they are purchased with their respective forms of debt or equity.
a weighted average of the capital components costs.
What are the three sources of external capital for a firm? Multiple choice question. paid in surplus, bonds, common stock preferred stock, bonds, retained earnings retained earnings, common stock, preferred stock common stock, preferred stock, bonds
common stock, preferred stock, bonds
What are the three sources of external capital for a firm? Multiple choice question. preferred stock, bonds, retained earnings common stock, preferred stock, bonds paid in surplus, bonds, common stock retained earnings, common stock, preferred stock
common stock, preferred stock, bonds
Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as Multiple Choice complementary effects. substitutionary effects. sunk effects. marginal effects.
complementary effects.
An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ___________________. Multiple Choice opportunity cost sunk cost asset costing reference depreciable basis
depreciable basis
Accelerated depreciation allows firms to Multiple Choice receive less of the dollars of depreciation earlier in the asset's life. receive more of the dollars of depreciation earlier in the asset's life. not pay any taxes during an asset's life. receive more of the dollars of depreciation later in the asset's life.
receive less of the dollars of depreciation earlier in the asset's life.
Which of the following is a principle of capital budgeting which states that the calculations of cash flows should remain independent of financing? Multiple Choice generally accepted accounting principle financing principle separation principle WACC principle
separation principle
If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n) Multiple Choice incremental cash outflow. opportunity cost. sunk cost. expensible item.
sunk cost.
Which of the following makes this a true statement? If the new project does significantly increase the firm's overall risk Multiple Choice the increased risk will be borne equally amongst the bondholders, preferred stockholders, and common stockholders. the increased risk will be borne disproportionately by bondholders. the increased risk will be borne disproportionately by preferred stockholders. the increased risk will be borne disproportionately by common stockholders.
the increased risk will be borne disproportionately by common stockholders.
Which of the following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity? Multiple Choice when you are able to estimate the market risk premium with certainty when you are able to estimate the risk-free rate with certainty when you are able to estimate the firm's beta with certainty when the firm pays a constant dividend
when you are able to estimate the firm's beta with certainty
