Study Guide part 2

(Income statement above question) A garage is installing a new "bubble-wash" car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10 %, what is the net present value (NPV) of this project? A) $150,548 B) $165,603 C) -$143,021 D) -$135,493

A) $150,548

(MACRS/Deprec. schedule shown above) A bakery invests $40,000 in a light delivery truck. This was depreciated using the five -year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000 , what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A) $17,208 B) $11,520 C) $3792 D) $9480

A) $17,208

A firm is considering a new project that will generate cash revenue of $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35 %? A) $416,250 B) $374,625 C) $341,250 D) $499,500

A) $416,250

(Balance sheet above question) The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital? A) $46 thousand B) $86 thousand C) $126 thousand D) $7 thousand

A) $46 thousand

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $50 million each year, and expects these to grow at 4% each year. The upfront project costs are $420 million and Ford's weighted average cost of capital is 9 %. If the issuance costs for external finances are $20 million, what is the net present value (NPV) of the project? A) $560 million B) $616 million C) $588 million D) $504 million

A) $560 million

Assume Lavender Corporation has a market value of $4 billion of equity and a market value of $19.8 billion of debt. What are the weights in equity and debt that are used for calculating the WACC? A) 0.168 , 0.832 B) 0.832, 0.168 C) 0.10 , 0.90 D) 0.90 , 0.10

A) 0.168 , 0.832

Assume the market value of Fords' equity, preferred stock and debt are $6 billion, $3 billion, and $13 billion, respectively. Ford has a beta of1.7, the market risk premium is8%, and the risk-free rate of interest is 3%. Ford's preferred stock pays a dividend of $2.50 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 9.5 %. What is Ford's weighted average cost of capital if its tax rate is 35 %? A) 9.31% B) 11.18% C) 10.24% D) 9.78%

A) 9.31%

SIROM Scientific Solutions has $12 million of outstanding equity and $4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 30 %. A) 9.70% B) 8.73% C) 10.67% D) 9.22%

A) 9.70%

The after-tax cost of debt ________ the before-tax cost of debt for a firm that has a positive marginal tax rate. A) is always less than B) may be greater than or less than C) is always greater than D) is always equal to

A) is always less than

Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking? A) option to delay B) option to expand C) option to abandon D) option to switch

A) option to delay

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called ________. A) scenario analysis B) accounting break-even analysis C) internal rate of return (IRR) analysis D) sensitivity analysis

A) scenario analysis

(MACRS/Deprec. schedule shown above) A firm is considering the purchase of a new machine for $325,000 . The firm is unsure if it should use the 3-Year MACRS schedule or straight-line depreciation over three years. What is the difference in the book value after three years if the firm uses MACRS instead of straight-line depreciation? A) $48,166 B) $0 C) $24,083 D) $300,918

B) $0

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35 % and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project? A) $1,080,000 B) $1,260,000 C) $1,134,000 D) $1,890,000

B) $1,260,000

(Income statement shown above) Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the difference in manufacturing expense for break-even point, if all other estimates are correct and the cost of capital is 9%? A) $1.99 million B) $1.66 million C) $2.32 million D) $1.83 million

B) $1.66 million

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000 . This in turn would cause inventory to increase by $125,000 , accounts receivable to increase by $100,000 , and accounts payable to increase by $90,000 . What is the firm's expected change in net working capital? A) $315,000 B) $135,000 C) $225,000 D) $1,735,000

B) $135,000

Assume Ford Motors expects a new hybrid-engine project to produce incremental cash flows of $45 million each year, and expects these to grow at 3 % each year. The upfront project costs are $380 million and Ford's weighted average cost of capital is 9 %. If the issuance costs for external finances are $10 million, what is the net present value (NPV) of the project? A) $396 million B) $360 million C) $324 million D) $378 million

B) $360 million

SAP Inc. received a $1.5 million grant under its Small Business Innovation program. SAP invested the grant money and developed a system to remove metal contaminants from storm water in shipyards. The firm estimates that each shipyard spends $500,000 a year on storm water clean-up efforts. If SAP is able to sign up and retain four shipyards in the first year onwards, what is the present value (PV) of the project (net of investment) if the cost of capital for SAP is 14% per year? Assume a cost of operations and other costs for SAP equal 50 % of revenue. A) $4.80 million B) $5.64 million C) $4.51 million D) $5.93 million

B) $5.64 million

A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colors. If this device is a success, the manufacturer plans to release gaming versions of its trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard? A) option to delay B) option to expand C) option to abandon D) option to switch

B) option to expand

A firm incurs $70,000 in interest expenses each year. If the tax rate of the firm is 30 %, what is the effective after-tax interest rate expense for the firm? A) $39,200.00 B) $34,300.00 C) $49,000.00 D) $56,350.00

C) $49,000.00

Your estimate of the market risk premium is 7%. The risk-free rate of return is 4% and General Motors has a beta of 1.6 . What is General Motors' cost of equity capital? A) 13.7% B) 16.0% C) 15.2% D) 14.4%

C) 15.2%

Which of the following statements is FALSE? A) Issuance costs increase the WACC. B) Issuance costs should be treated as cash outflows in NPV analysis. C) External equity is less expensive than retained earnings. D) A project that can be financed with internal funds will be less costly than the same project if it were financed with external funds.

C) External equity is less expensive than retained earnings.

An insurance office owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A) the amount obtained by renting the sixth floor B) cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces C) the cost of the research into the feasibility of renting the sixth floor D) the cost of refurbishing the new space to be occupied by the Human Resources Department

C) the cost of the research into the feasibility of renting the sixth floor

The book value of a firm's equity is $100 million and its market value of equity is $200 million. The face value of its debt is $50 million and its market value of debt is $60 million. What is the market value of assets of the firm? A) $150 million B) $250 million C) $160 million D) $260 million

D) $260 million

Assume IBM just paid a dividend of $4.50 and expects these dividends to grow at 8 % a year. The price of IBM is $100 per share. What is IBM's cost of equity capital? A) 8% B) 3.86% C) 12.22% D) 12.86 %

D) 12.86 %

Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC? A) 33.49 % for debt, 66.51% for equity B) 29.30 % for debt, 70.70 % for equity C) 37.67% for debt, 62.33 % for equity D) 41.86 % for debt, 58.14% for equity

D) 41.86 % for debt, 58.14% for equity

Assume Ford Motor Company is discussing new ways to recapitalize the firm and raise additional capital. Its current capital structure has a 25 % weight in equity, 10 % in preferred stock, and 65 % in debt. The cost of equity capital is 13 %, the cost of preferred stock is 9 %, and the pretax cost of debt is 8 %. What is the weighted average cost of capital for Ford if its marginal tax rate is 40 %? A) 8.36% B) 8.00% C) 6.91% D) 7.27%

D) 7.27%

The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 7%, and a price of $95. What is the pretax cost of debt if the tax rate is 30%. A) 6.5% B) 4.9% C) 7.0% D) 7.37%

D) 7.37%

Which of the following statements regarding real options is NOT correct? A) Real options should only be exercised when they increase the NPV of a project. B) Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. C) Real options build greater flexibility into a project and thus increase its net present value (NPV). D) Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date.

D) Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date.

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called ________. A) scenario analysis B) accounting break-even analysis C) internal rate of return (IRR) analysis D) sensitivity analysis

D) sensitivity analysis

Holding everything else constant, an increase in cash ________ a firm's net debt. A) will have no impact on B) may increase or decrease C) will increase D) will decrease

D) will decrease