FIN 2303 Final Exam

22. Payback period formula?

# of years prior to full recovery + (unrecovered cost at start of year/ cash flow during full year recovery)

Which of the following statements regarding cost of capital is/are CORRECT?

-Cost of Capital is always expressed in norminal terms (i.e. as annual percentage rates). -Cost of Capital is the cost of raising new capital for a firm. -Cost of capital is evaluated on a FORWARD-LOOKING basis.

Suppose a company assigns a cost of capital of 10% for projects with average risk. However, it assigns a cost of capital of 13% for project with above-average risk and a cost of capital of 7% for projects with a below-average risk. Which of the following projects would be accepted in this company?

A project with below-average risk and has a return of 8.5%. Cost of capital is 7%, and 8.5% > 7%, so we ACCEPT.

Given below are information on several INDEPENDENT projects Sabre Printers Inc. is evaluating. The cutoff payback period is 2 years. Under the regular payback period, which project(s) should Sabre accept? A. 3.23 B. 1.45 C. 2.10 D. 0.60 E. 3.45 F. 2.25 G. 4.45

Accept projects B and D because they are LESS THAN 2(payback period). -accept if < payback period -decline if > payback period

Novomix Inc. pays its preferred stockholders a dividend of $1.75 every quarter. The current price of one of their preferred shares is $35.30. Novomix pays 21% in corporate tax. What is the cost of its preferred shares?

Cost of preferred stock= annual dividend/Share price. 1.75(4)/35.30 = 0.1983 or 19.83%

A bond is selling at a premium. Which of the following statements must be true regarding this bond?

It has a coupon rate HIGHER than its yield to maturity.

Which of the following statements is correct?

MIRR is based on a generally more reasonable reinvestment rate assumption than the IRR.

Traveler Inc. needs to purchase a new photocopy machines for its office. There are two models the management is considering. The first model costs $20,000 and while the second model costs $30,000. Both machines have an expected lifetime of 5 years. The annual maintenance costs of each model are given below. If the WACC of the company is 10%, what would your recommendation be?

Model 1: 26713.805 Model 2: 37581.6 Model 1 SHOULD be selected because its value is LESS than the total cost of Model 2. (30,000)

You are considering the following two mutually exclusive projects. If the cost of capital for both projects is 7%, which statement concerning capital-budgeting rules listed will be correct in this situation?

NPV will choose the correct project(s), IRR will not. -Mutually Exclusive, only one project can be selected. -Select the project with higher NPV, project A. -NPV DECISION RULE IS PREFERRED, IT DIRECTLY INCREASES THE SHAREHOLDERS VALUE.

MIRR:

PV of cash outflows: terminal value/(1+rate)^n PV of cash inflows: terminal value x (1+rate)^n - cash flow # and n must equal the # of cash flows.

Casio's has the following data: risk free rate = 3.00%; market risk premium= 12.00%; and beta = 1.3. What is the firm's cost of equity based on the CAPM? a) 18.24% b) 15.00% c) 18.60% d) 9.00%

Rs= Rf + Beta(Rm-Rf) 0.03 + 1.3(0.12) 0.03 + 0.156 = 0.186 or 18.60% (Rm-Rf)= market premium.

Given below are the CAPM betas for several stocks. Which stock(s) is(are) likely to be more volatile than the stock market on average? A: 1.00 B: 1.15 C: 2.20 D: 0.85 E: 0.30

Stocks B and C are likely to be more volatile than the stock market. Betas > 1 , More Volatile Betas < 1 , Less Volatile

When calculating the WACC, you need to evaluate the relative weights of each component cost of capital. For this you should always try and use the:

Target Capital Structure.

Which of the following bonds are considered to be virtually default risk free? a) Corporate bonds b) Treasury bonds c) Municipal bonds d) Foreign bonds

Treasury Bonds are virtually risk free.