FIN-317 Final - Desantis (MC)

.All else the same, a higher corporate tax rate _____________________ . A. will decrease the WACC of a firm with some debt in its capital structure. B. will increase the WACC of a firm with some debt in its capital structure. C. will not affect the WACC of a firm with some debt in its capital structure. D. will decrease the WACC of a firm with no debt in its capital structure. E. will change the WACC of a firm with some debt in its capital structure, but the direction is unclear.

A) will decrease the WACC of a firm with some debt in its capital structure

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project? A) The project never pays back B) 4.75 years C) 5.00 years D) 5.33 years E) 6.00 years

D) 5.33 years

You are considering a project that costs $300 and has expected cash flows of $110, $121 and$133.10 over the next three years. If the appropriate discount rate for the project's cash flows is 10%, what is the net present value of this project? A) The NPV is negative B) $ 0.00 C) $ 0.71 D) $19.79 E) $64.10

B) 0.00

What would you pay for a share of ABC Corporation stock today if the next dividend will be $2 per share, your required return on equity investments is 12%, and the stock is expected to be worth $110 one year from now? A) $ 95 B) $100 C) $110 D) $115 E) $120

B) 110

Which of the following can cause a project to have multiple IRRs? A) The project has a large initial outlay. B) A ten-year project with a large initial cost and a negative cash flow in the last year of the project's life. C) A project has negative cash flows in the first three years, but positive cash flows thereafter. D) Whenever project cash flows are conventional. E) With mutually exclusive investments.

B) A ten-year project with a large initial cost and a negative cash flow in the last year of the project's life

If markets are in equilibrium, which of the following conditions will exist? A. Each stock's expected return should equal its realized return as seen by the marginal investor. B. Each stock's expected return should equal its required return as seen by the marginal investor. C. All stocks should have the same expected return as seen by the marginal investor. D. The expected and required returns on stocks and bonds should be equal. E. All stocks should have the same realized return during the coming year.

B) Each stock's expected return should equal its required return as seen by the marginal investor.

You are considering an investment with the following cash flows. Your required return is 10%, and you require a payback of 3 years. If your objective is to maximize your wealth, should you take this investment? Cash Flow -$100,000 $40,000 $40,000 $40,000 $40,000 -$50,000 A) Yes, because the payback is 2.5 years. B) No, because the NPV is negative. C) No, because the project has a large negative cash flow at the end of its life

B) No, because the NPV is negative

A company estimates that an average-risk project has a WACC of 10%, a below-average risk project has a WACC of 8% and an above-average risk project has a WACC of 12%. Which of the following independent projects should the company accept? A. Project A has average risk and a return of 9%. B. Project B has below average risk and a return of 8.5%. C. Project C has above-average risk and a return of 11%. D. All of the projects above should be accepted. E. None of the projects above should be accepted.

B) Project B has below average risk and a return of 8.5%.

An NPV of zero implies that an investment's ____________. A) cost exceeds the present value of its cash inflows B) cost is equal to the present value of its cash inflows C) IRR is greater than the firm's required rate of return D) present value of cash inflows are positive E) present value of cash inflows exceed the investment's cost

B)cost is equal to the present value of its cash inflows

The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for one year from now? A) $127.06 B) $133.75 C) $143.11 D) $149.80 E) $152.78

C) 143.11

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age andpass on, sales of the product are expected to decline. Thus, demographics suggest that earningsand dividends will decline at a rate of 4% annually forever. The firm just paid a dividend of$2.50; given a required return of 12%, what should the stock sell for today? A) $10.25 B) $12.50 C) $15.00 D) $16.25 E) $32.50

C) 15.00

McIver's Meals, Inc. currently pays a $1.00 annual dividend. Investors believe that dividendswill grow at 15% next year, 10% annually for the two years after that, and 5% annually thereafter. Assume the required return is 10%. What is the current market price of the stock? A) $21.77 B) $22.99 C) $25.09 D) $26.13 E) $27.65

C) 25.09

The dividend on Simple Motors common stock will be $2 in 1 year, $3.50 in 2 years, and$5.00 in 3 years. You can sell the stock for $75 in 3 years. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock today? A) $59.69 B) $64.65 C) $64.82 D) $65.66 E) $71.30

C) 64.82

Which of the following statements about the cost of capital is NOT correct? A. A company's target capital structure affects its weighted average cost of capital. B. Weighted average cost of capital calculations should be based on the after-tax costs of all the individual capital components. C. If a company's tax rate increases, then, all else equal, its weighted average cost of capital will increase. D. Capital structure weights in weighted average cost of capital calculations should be based on market values of capital components. E. An increase in the risk-free rate is likely to increase the marginal costs of both debt and equity financing.

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

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 highWACC.

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

Which of the following statements is CORRECT? A. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. B. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also5%. C. The stock valuation model, P 0 = D1 /(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. D. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. E. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.

C) The stock valuation model, P 0 = D1 /(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

A company is considering a new project. The company's CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the company's cost of capital. Which of the following factors should the CFO include when estimating the relevant cash flows? a. Any sunk costs associated with the project. b. Any interest expenses associated with the project. c. Any opportunity costs associated with the project. d. Statements b and c are correct. e. All of the statements above are correct.

C) any opportunity costs associated with the project

A firm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash flows occurring in the distant future, and avoid projects that require a large amount of research and development expenses. This firm may be justified in using the____________ to evaluate its projects. A) IRR rule B) NPV rule C) payback period rule

C) payback period rule

Suppose a firm uses a constant WACC in determining the value of capital budgeting projects rather than using the individual project's or individual division's (within the firm) WACC (i.e.the risk-appropriate WACC). The firm will tend to ____________ . A. accept profitable, low risk projects and reject unprofitable, high risk projects. B. accept profitable, low risk projects and accept unprofitable, high risk projects. C. reject profitable, low risk projects and accept unprofitable, high risk projects. D. reject profitable, low risk projects and reject unprofitable, high risk projects. E. become less risky over time.

C) reject profitable, low risk projects and accept unprofitable, high risk projects.

Which of the following is not a cash flow that results from the decision to accept a project? a. Changes in net operating working capital. b. Shipping and installation costs. c. Sunk costs. d. Opportunity costs. e. Externalities.

C) sunk costs

If in the opinion of a given investor a stock's expected return exceeds its required return, this suggests that the investor thinks A. the stock is experiencing supernormal growth. B. the stock should be sold. C. the stock is a good buy. D. management is probably not trying to maximize the price per share. E. dividends are not likely to be declared

C) the stock is a good buy

Suppose that you have just purchased a share of stock for $22.50. The most recent dividend was $1.50 and dividends are expected to grow at a rate of 5% indefinitely. What must your required return be on the stock? A) 5.00% B) 7.00% C) 10.25% D) 12.00% E) 13.67%

D) 12%

Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years the growth rate will drop to a steady 4%. At the end of year 5, Oly will issue its first dividend in the amount of $2.00 per share. If the required return is 16%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4. A) $7.49 B) $7.67 C) $8.17 D) $9.20 E) $9.91

D) 9.20

Based on the payback rule, which of the following is false? A) With a payback cutoff of 1.5 years, both projects are unacceptable. B) With a payback cutoff of 3 years, both projects are acceptable. C) With a payback cutoff of 1 year, neither project is acceptable. D) Since both projects pay back, the NPV of both must be positive. E) You would be indifferent between the two projects

D) Since both projects pay back, the NPV of both must be positive

Which of the following is true regarding the WACC? A. The WACC is equal to the firm's debt cost times (1-tax rate). B. The WACC requires the cost of debt to be increased by (1-tax rate). C. The WACC is directly observable in financial markets. D. The WACC is the required return on any investments a firm makes that have a level of risk equal to that of the present operations of the firm. E. The WACC reflects the risk and target capital structure of the market as a whole.

D) The WACC is the required return on any investments a firm makes that have a level of risk equal to that of the present operations of the firm

Which of the following items should Bev's Beverage Inc. take into account when evaluating a proposed prune juice project? a. The company spent $300,000 two years ago to renovate its Cincinnati plant. These renovations were made in anticipation of another project that the company ultimately did not undertake. b. If the company did not proceed with the prune juice project, the Cincinnati plant could generate leasing income of $75,000 a year. c. If the company proceeds with the prune juice project, it is estimated that sales of the company's apple juice will fall by 3 percent a year. d. Statements b and c are correct. e. All of the statements above are correct.

D) statement B & C are correct

Hancock Furniture Inc. is considering expansion plans for building a new store. In reviewing the proposed new store, several members of the firm's financial staff have made a number of points regarding the proposed project. Which of the following items should the CFO include in the analysis when estimating the project's net present value (NPV)? a. The new store is expected to take away sales from two of the firm's existing stores located in the same town. b. The company owns the land that is being considered for use in the proposed project. This land could instead be leased to a local developer. c. The company spent $2 million two years ago to put together a national advertising campaign. This campaign helped generate the demand for some of its past products, which have helped make it possible for the firm to consider opening a new store. d. Statements a and b are correct. e. All of the statements above are correct.

D) statements a and b are correct

Which of the following should a company consider in an analysis when evaluating a proposed project? a. The new project is expected to reduce sales of the company's existing products by 5 percent a year. b. Vacant facilities not currently leased out could instead be leased out for $10 million a year. c. The company spent $30 million last year to improve the vacant facilities in which the new project will be housed. d. Statements a and b are correct. e. All of the statements above are correct.

D) statements a and b are correct

Pickles Corp. is a company that sells bottled iced tea. The company is thinking about expanding its operations into the bottled lemonade business. Which of the following factors should the company incorporate into its capital budgeting decision as it decides whether or not to enter the lemonade business? a. If the company enters the lemonade business, its iced tea sales are expected to fall 5 percent as some consumers switch from iced tea to lemonade. b. Two years ago the company spent $3 million to renovate a building for a proposed project that was never undertaken. If the project is adopted, the plan is to have the lemonade produced in this building. c. If the company doesn't produce lemonade, it can lease the building to another company and receive after-tax cash flows of $500,000 a year. d. Statements a and c are correct. e. All of the statements above are correct.

D) statements a and c are

You are going to choose between two investments. Both cost $80,000, but investment A pays $35,000 a year for 4 years while investment B pays $30,000 a year for 5 years. If your required return is 13%, which should you choose? A) A because it pays back sooner. B) A because its IRR exceeds 13%. C) A because it has a higher IRR. D) B because its IRR exceeds 13%. E) B because it has a higher NPV

E) B because it has a higher NPV

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a ________________. A) capital gains yield and a dividend growth rate B) capital gains growth rate and a dividend growth rate C) dividend payout ratio and a required rate of return D) dividend yield and the present dividend E) dividend yield and a capital gains yield

E) Dividen Yield & Capital Gains Yield

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 sometime 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 constitutes an example of a cost that is not incremental, and therefore, not relevant in a capital budgeting decision? a. A firm has a parcel of land that can be used for a new plant site, or alternatively, can be used to grow watermelons. b. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces. c. A firm orders and receives a piece of new equipment that is shipped across the country and requires $25,000 in installation and set-up costs. d. Statements a, b, and c are examples of incremental cash flows, and therefore, relevant cash flows. e. None of the statements above is an example of an incremental cash flow.

d. statements a, b, and c are examples of incremental cash flows, and therefore relevant cash flows