Finance Homework Seven

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? A) $2,470.01 B) $2,111.41 C) $1,992.43 D) $798.48 E) $1,240.23

$1,992.43 NPV = -$42,700 + $9,250 ×{1 - [1 / (1 + .1465)9]} / .1465 NPV = $1,992.43

The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent. The profitability index is 1.09 and the firm's tax rate is 34 percent. What is the initial cost of the project? A) $2,314.07 B) $2,491.74 C) $2,428.32 D) $2,018.50 E) $2,066.67

$2,491.74 PI = 1.09 = $2,716 / Initial cost Initial cost = $2,491.74

Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend? $4.80 $3.20 $7.50 $6.40 $1.60

$6.40 Preferred dividend = 4 ×$1.60 = $6.40

A project has the following cash flows. What is the payback period? (Chart) A) 2.59 years B) 3.04 years C) 2.96 years D) 3.24 years E) 3.13 years

3.13 years

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $142,000? A) 9.43 percent B) 8.42 percent C) 8.29 percent D) 7.81 percent E) 7.55 percent

8.42 percent NPV = 0 = -$142,000 + $41,650 / (1 + IRR) + $41,650 / (1 + IRR)2 + $41,650 / (1 + IRR)3 + $49,000 / (1 + IRR)4 IRR = 8.42 percent

Today's stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount? A) $.66 B) $1.33 C) $1.08 D) $1.28 E) $1.13

A) $.66 Annual dividend = .022 ×$29.86 = $.66

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $2.8 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 12.5 percent. What is the benefit of the remodeling project to Professional Properties? A) $119,666.04 B) -$89,072.00 C) -$111,417.03 D) $105,214.70 E) $108,399.15

A) $119,666.04 NPV = -$2,800,000 + $820,000 ×{1 - [1 / (1 + .125)5]} / .125 NPV = $119,666.04

Delta Mu Delta is considering purchasing some new equipment costing $393,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return? A) 11.23 percent B) 12.01 percent C) 12.49 percent D) 11.63 percent E) 10.87 percent

A) 11.23 percent AAR = [($16,900 + 25,300 + 27,700 + 18,400)/4]/[($393,000 + 0)/2] = .1123, or 11.23 percent

A project has the following cash flows. What is the internal rate of return? Picture 8.57 percent 10.47 percent 9.19 percent 10.72 percent 11.21 percent

A) 8.57 percent NPV = 0 = -$89,300 + $32,900 / (1 + IRR) + $64,200 / (1 + IRR)2 + $5,800 / (1 + IRR)3 IRR = 8.57%

The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not? A) Yes, because the IRR is 12.74 percent B) Yes, because the IRR is 10.75 percent C) No, because the IRR is 10.75 percent D) No, because the IRR is 12.74 percent E) The answer cannot be determined as there are multiple IRRs

A) Yes, because the IRR is 12.74 percent NPV = 0 = -$1,460,000 + $223,000 / (1 + IRR) + $600,000 / (1 + IRR)2 + $600,000 / (1 + IRR)3 + $600,000 / (1 + IRR)4 IRR = 12.74 percent The project should be accepted because the IRR is greater than the required rate.

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, which project(s), if either, should it accept? Picture A) Accept Project B but not Project A B) Reject both Projects A and B C) Both Project A and B are acceptable but you can select only one project D) Accept both Projects A and B E) Accept Project A but not Project B

Accept both Projects A and B

Which one of the following methods of analysis ignores cash flows? A) Profitability index B) Modified internal rate of return C) Payback D) Average accounting return E) Internal rate of return

Average accounting return

A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $42,500 a year. What is the net present value of this project at a discount rate of 11.6 percent? A) $26,391.08 B) $26,343.72 C) $23,602.18 D) $25,810.33 E) $24,399.99

B) $26,343.72 NPV = -$49,000 + (-$18,700 / 1.116) + $42,500 / 1.1162 + $42,500 / 1.1163 + $42,500 / 1.1164 NPV = $26,343.72

Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent. A) 3.92 years; 3.79 years; -$17,108.60; $1,211.48; accept Project B only B) 3.96 years; 3.42 years; -$19,764.06; -$10,566.02; reject both projects C) 4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only D) 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Projects E) 3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only

B) 3.96 years; 3.42 years; -$19,764.06; -$10,566.02; reject both projects

Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project? Rich, but not Joe Joe, but not Rich Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero Both Joe and Rich Neither Joe nor Rich

Both Joe and Rich NPVJoe = - $25,500 + $15,800 / 1.085 + $15,300 / 1.0852 NPVJoe = $2,058.88 NPVRich = -$25,500 + $15,800 / 1.125 + $15,300 / 1.1252 NPVRich = $633.33 Both Joe and Rich should accept the project as both NPVs are positive.

A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount? A) $5.42 B) $5.09 C) $5.25 D) $5.14 E) $4.75

C) $5.25 Dividend = .0968 ×$54.20 = $5.25

The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? A) 3.79 years B) 2.87 years C) 4.23 years D) 3.23 years E) 3.41 years

C) 4.23 years Payback = 4 + ($46,700 -10,000 -10,000 -12,000 -12,000)/$12,000 = 4.23 years

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting? A) Aggregate B) Condensed C) Straight D) Cumulative E) Proxy

Cumulative

What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent? (Chart) A) $1,211.40 B) $1,402.02 C) $507.19 D) -$1,232.68 E) -$1,482.15

D) $-1,232.68 NPV = $11,400 + (-$2,500 / 1.0575) + (-$2,500 / 1.05752) + (-$9,500 / 1.05753) NPV = -$1,232.68

AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday's closing price if the firm pays a constant $.40 per share quarterly dividend? A) $16.90 B) $16.67 C) $18.01 D) $18.47 E) $17.40

D) $18.47 Yesterday's closing price = $18.24 + .23 = $18.47

Miller Brothers is considering a project that will produce cash inflows of $32,500, $38,470, $40,805, and $41,268 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $184,600? A) -7.39 percent B) -6.47 percent C) -7.62 percent D) -6.86 percent E) -6.24 percent

D) -6.86 percent NPV = 0 = -$184,600 + $32,500 / (1 + IRR) + $38,470 / (1 + IRR)2 + $40,805 / (1 + IRR)3 + ($41,268) / (1 + IRR)4 IRR = -6.86 percent

A project has the following cash flows. What is the internal rate of return? (Chart) A) 12.96percent B) 13.58 percent C) 13.10 percent D) 13.23 percent E) 13.67 percent

D) 13.23 percent NPV = 0 = -$33,800 + $12,360 / (1 + IRR) + $14,580 / (1 + IRR)2 + $16,710 / (1 + IRR)3 IRR = 13.23%

What is the net present value of a project with the following cash flows if the discount rate is 13.6 percent? (chart) A) $3,207.20 B) -$1,407.92 C) $406.11 D) -$5,433.67 E) $3,643.38

E) $3,643.38 NPV = -$63,600 + $18,200 / 1.136 + $34,500 / 1.1362 + $35,900 / 1.1363 NPV = $3,643.38

Whichever project you choose, if any, you require a rate of return of 14 percent on your investment. If you apply the payback criterion, you will choose Project ______; if you apply the NPV criterion, you will choose Project ______; if you apply the IRR criterion, you will choose Project _____; if you choose the profitability index criterion, you will choose Project ___. Based on your first four answers, which project will you finally choose? A) B; A; B; B; A B) A; A; B; B; A C) A; A; B; B; B D) A; B; A; A; B E) B; A; B; A; A

E) B; A; B; A; A

Jensen Shipping has four open seats on its board of directors. How many shares will a shareholder need to control to ensure that his or her candidate is elected to the board given the fact that the firm uses straight voting? Assume each share receives one vote. A) One-third of the shares plus one share B) Twenty percent of the shares plus one share C) Twenty-five percent of the shares plus one share D) Fifty percent of the shares plus one share E) Fifty-one percent of the shares plus one share

Fifty percent of the share plus one share

Which one of the following is most closely related to the net present value profile? A) Discounted payback B) Internal rate of return C) Profitability index D) Average accounting return E) Payback

Internal rate of return

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A) Payback and internal rate of return B) Payback and net present value C) Internal rate of return and net present value D) Profitability index and internal rate of return E) Net present value and profitability index

Internal rate of return and net present value

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. A) Profitability index of zero B) Modified internal rate of return that is equal to zero C) Payback period that exceeds the required period D) Negative average accounting return E) Internal rate of return that exceeds the required return

Internal rate of return that exceeds the required return

Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? A) Modified internal rate of return B) Internal rate of return C) Average accounting return D) Profitability index E) Indexed rate of return

Modified internal rate of return

Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent? (Chart) A) No, because the project's rate of return is 16.45 percent B) No, because the project's rate of return is 11.47 percent C) Yes, because the project's rate of return is 11.47 percent D) Yes, because the project's rate of return is 16.45 percent E) No, because the internal rate of return is zero percent

NO, because the project's rate of return is 16.45 percent NPV = 0 = -$132,000 + $97,000 / (1 + IRR) + $42,000 / (1 + IRR)2 + $28,000 / (1 + IRR)3 IRR = 16.45 percent The project should be rejected because its IRR is less than the required rate of return.

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A) Profitability index B) Internal rate of return C) Average accounting rate of return D) Net present value E) Payback

Net present value

On which one of the following dates do dividends become a liability of the issuer for accounting purposes? A) On the date the board declares the dividend b) First day of the fiscal year in which the dividend is expected to be paid C)On the date of payment D) Twelve months prior to the expected dividend payment date E) On the date the company announces the dividend to the public

ON the date the board declares the dividend

Which one of the following methods of analysis ignores the time value of money? A) Discounted cash flow analysis B) Profitability index C) Internal rate of return D) Payback E) Net present value

Payback

Which one of the following indicates that a project is expected to create value for its owners? A) Positive net present value B) Positive average accounting rate of return C) Payback period greater than the requirement D) Internal rate of return that is less than the requirement E) Profitability index less than 1.0

Positive net present value

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? A) Modified internal rate of return B) Payback C) Profitability index D) Internal rate of return E) Net present value

Profitability index

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. A) Average accounting return that exceeds the requirement B) Payback period that is shorter than the requirement period C) Profitability index less than 1.0 D) Internal rate of return that exceeds the required return E) Positive net present value

Profitability index less than 1.0

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? Project A; because it pays back faster Project B; because it has the higher net present value Project B; because it has the higher profitability index Project A; because it has the higher profitability index Project A; because it has the higher net present value

Project A; because it has the higher net present value

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority? Proxy Consent-form Cumulative Straight In absentia

Proxy

What is the market called that facilitates the sale of shares between individual investors? A) Inside B) Secondary C) Initial D) Primary E) Proxy

Secondary

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A) The cash flows are conventional. B) The investment has cash inflows that occur after the required payback period. C) One of the time periods within the investment period has a cash flow equal to zero. D) The investment is mutually exclusive with another investment of a different size. E) The initial cash flow is negative.

The investment is mutually exclusive with another investment of a different size

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? A) The net present value is greater than 1.0. B) The average accounting return is 1.0. C) The net present value is equal to zero. D) The investment never pays back. E) The internal rate of return exceeds the required rate of return.

The net present value is equal to zero

Which one of the following statements is correct? A) The payback period considers the timing and amount of all of a project's cash flows. B) The payback rule states that you should accept a project if the payback period is less than one year. C) The payback rule is biased in favor of long-term projects. D) The payback period ignores the time value of money. E) A longer payback period is preferred over a shorter payback period.

The payback period ignores the time value of money.

Which one of the following will occur when the internal rate of return equals the required return? A) The net present value will equal the initial cash outflow. B) The profitability index will equal the average accounting return. C) The average accounting return will equal 1.0. D) The profitability index will equal 1.0. E) The profitability index will equal 0.

The profitability index will equal 1.0

A broker is an agent who: A) offers new securities for sale to dealers only. B) is ready to buy or sell at any time. C) trades on the floor of an exchange for himself or herself. D) brings buyers and sellers together. E) buys and sells from inventory.

brings buyers and sellers together

The net present value: A) ignores cash flows that are distant in the future. B) is equal to the initial investment when the internal rate of return is equal to the required return. C) method of analysis cannot be applied to mutually exclusive projects. D) decreases as the required rate of return increases. E) is unaffected by the timing of an investment's cash flows.

decreases as the required rate of return increases

Net present value involves discounting an investment's: A) future profits. B) future cash flows. C) assets. D) liabilities. E) costs.

future cash flows

If shareholders are granted a preemptive right they will: A) be paid dividends prior to the preferred shareholders during the preemptive period. B) be entitled to two votes per share of stock. C) have priority in the purchase of any newly issued shares. D) be given the choice of receiving dividends either in cash or in additional shares of stock. E) be able to choose the timing and amount of any future dividends.

have priority in the purchase of any newly issued shares

The stream of customer instructions to buy and sell securities is called the: A) order flow. B) buyer's stream. C) execution stream. D) market maker. E) operations flow.

order flow

To be a member of the NYSE, you must: be a DMM. be a primary dealer. own a trading license. be registered as a floor trader. buy a seat.

own a trading license

If an investment is producing a return that is equal to the required return, the investment's net present value will be: A) zero. B) equal to the project's net profit. C) less than, or equal to, zero. D) positive. E) greater than the project's initial investment.

zero