Q&A Hero

Q: In cash flow estimation, the presence of externalities has no direct cash flow effects. a. True b. False

Q: Net supplemental operating cash flow is calculated by adding back the change in depreciation to the change in income after taxes. a. True b. False

Q: Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis. a. True b. False

Q: Although it is difficult to make accurate forecasts, the initial outlays and subsequent costs of large projects are forecast with great accuracy, but revenues are more uncertain and large errors are not uncommon. a. True b. False

Q: Estimating project cash flows is considered the most important and the most difficult step in the capital budgeting process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of estimating cash flows. a. True b. False

Q: With the current techniques available, estimating cash flows has become the easiest step in the analysis of a capital budgeting project. a. True b. False

Q: Changes in net working capital do not need to be considered in capital budgeting cash flow analysis as long as the nominal (undiscounted) values of the changes are identical in each time period. a. True b. False

Q: When calculating the cash flows for a project, you should include interest payments. a. True b. False

Q: If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. a. True b. False

Q: Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant in the analysis. a. True b. False

Q: Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV. a. True b. False

Q: If a project's NPV exceeds the project's IRR, then the project should be accepted. a. True b. False

Q: The phenomenon called "multiple internal rates of return" arises when two or more mutually exclusive projects which have different lives are being compared. a. True b. False

Q: The IRR of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the IRR of a project whose cash flows come in more slowly. a. True b. False

Q: Other things held constant, an increase in the required rate of return will result in a decrease of a project's IRR. a. True b. False

Q: Under certain conditions, a particular project may have more than one IRR. One condition under which this situation can occur is if, in addition to the initial investment at time = 0, a negative cash flow occurs at the end of the project's life. a. True b. False

Q: The internal rate of return (IRR) method of evaluating investment projects equates the present value of cash inflows with the present value of cash outflows by discounting all of the cash flows at the firm's required rate of return. a. True b. False

Q: The internal rate of return is that discount rate which equates the present value of the cash outflows (or costs) with the present value of the cash inflows. a. True b. False

Q: Assuming that the total cash flows are equal, the NPV of a project whose cash flows accrue relatively rapidly is more sensitive to changes in the discount rate than is the NPV of a project whose cash flows come in more slowly. a. True b. False

Q: One of the advantages of the payback period (either regular or discounted) is that it considers all cash flows throughout the entire life of a project. a. True b. False

Q: One advantage of the payback period method of evaluating fixed asset investment possibilities is that it provides a rough measure of a project's liquidity and risk. a. True b. False

Q: Given two mutually exclusive projects and a zero required rate of return, the payback period and NPV method of selecting investments will always lead to the same decision on which project to undertake. a. True b. False

Q: In its most general sense, capital budgeting is concerned both with the demand for and the supply of funds for long-term investment. a. True b. False

Q: The primary function of the capital budget is to forecast the funds required for future investments that must be raised through external funding, that is, by selling stock or bonds. a. True b. False

Q: A firm should never undertake an investment if accepting the project would cause an increase in the firm's required rate of return. a. True b. False

Q: Uncertainty regarding the domestic flows that result from converting foreign cash flows is what type of risk? a. Repatriation b. Expropriation c. Exchange Rate d. Political

Q: Which of the following capital budgeting techniques does not adjust for the riskiness of the cash flows? a. IRR b. NPV c. MIRR d. Payback

Q: A(n) ____ is the return on the best alternative use of an asset, the highest return that will not be earned if funds are not invested in a particular project. a. opportunity cost b. sunk cost c. incremental cash flow d. externality

Q: Which of the following decision measures should capital budgeting decision makers consider? a. discounted payback b. NPV c. IRR d. MIRR e. Although NPV is considered the most important method in the decision process, the other measures can provide different relevant information that is useful to the process and thus should be used when appropriate

Q: A(n) ____ is a cash outlay that already has been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. a. sunk cost b. opportunity cost c. externality d. incremental cash flow

Q: ____ projects are a set of projects where the acceptance of one project means that other projects cannot be accepted. a. Mutually exclusive b. Independent c. Replacement d. Expansion

Q: ____ projects are projects whose cash flows are not affected by the acceptance or non-acceptance of other projects. a. Independent b. Replacement c. Expansion d. Mutually exclusive

Q: ____ are decisions about whether to purchase capital projects and add them to existing assets so as to increase existing operations. a. Replacement decisions b. Expansion decisions c. Independent decisions d. Mutually exclusive decisions

Q: ____ are decisions about whether to purchase capital assets to take the place of existing assets so as to maintain existing operations. a. Replacement decisions b. Expansion decisions c. Independent decisions d. Mutually exclusive decisions

Q: Which of the following statements is correct? a. Capital budgeting has long-term effects on firm leading the firm to lose some decision-making flexibility. b. Because asset expansion is fundamentally related to future sales, the decision to buy an asset involves an implicit sales forecast. c. Timing is important in capital budgeting. d. Capital budgeting is important because the acquisition of fixed assets typically involves substantial expenditures. e. All of the above are correct.

Q: After a long drought, the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000. It is estimated that the irrigation system will increase revenues by $20,500 annually, although operating expenses other than depreciation will also increase by $5,000. The system will be depreciated using MACRS over its depreciable life (5 years) to a zero salvage value. If the tax rate on ordinary income is 40 percent, what is the project's IRR? a. 12.6% b. u22121.3% c. 13.0% d. 10.2% e. u22124.8%

Q: After getting her degree in marketing and working for 5 years for a large department store, Sally started her own specialty shop in a regional mall. Sally's current lease calls for payments of $1,000 at the end of each month for the next 60 months. Now the landlord offers Sally a new 5-year lease which calls for zero rent for 6 months, then rental payments of $1,050 at the end of each month for the next 54 months. Sally's required rate of return is 11 percent. By what absolute dollar amount would accepting the new lease change Sally's theoretical net worth? (Hint: The required rate of return per month is 11%/12 = 0.9166667%.) a. $2,810.09 b. $3,243.24 c. $3,803.06 d. $4,299.87 e. $4,681.76

Q: As the director of capital budgeting for Raleigh/Durham Company, you are evaluating two mutually exclusive projects with the following net cash flows: Year Project X Project Z 0 u2212$100 u2212$100 1 50 10 2 40 30 3 30 40 4 10 60 Is there a crossover point in the relevant part of a NPV profile graph (the northeast, or upper right, quadrant)? a. No. b. Yes, at r u2248 7%. c. Yes, at r u2248 9%. d. Yes, at r u2248 11%. e. Yes, at r u2248 13%.

Q: Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $50,000/year for 3 years; variable operating costs (excluding depreciation) will be 40 percent of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent required rate of return. Inflation is zero. What is the project's NPV? a. $7,673.71 b. $12,851.75 c. $17,436.84 d. $24,989.67 e. $32,784.25

Q: Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation) will be 50 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent required rate of return. Inflation is zero. What is the project's NPV? a. $6.24 b. $7.89 c. $8.87 d. $9.15 e. $10.41

Q: Mid-State Electric Company must clean up the water released from its generating plant. The company's required rate of return is 10 percent for average projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low-risk projects. Clean up Plan A, which is of average risk, has an initial cost of u2212$1,000 at time 0, and its operating cost will be u2212$100 per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of u2212$300, and its annual operating cost over Years 1 to 10 will be u2212$200. What is the proper PV of costs for the better project? a. u2212$1,430.04 b. u2212$1,525.88 c. u2212$1,614.46 d. u2212$1,642.02 e. u2212$1,728.19

Q: Your company must ensure the safety of its work force. Two plans are being considered for the next 10 years: (1) Install a high electrified fence around the property at a cost of $100,000. Maintenance and electricity would then cost $5,000 per year over the 10-year life of the fence. (2) Hire security guards at a cost of $25,000 paid at the end of each year. Because the company plans to build new headquarters with a "state of the art" security system in 10 years, the plan will only be in effect until that time. Your company's required rate of return is 15 percent for average projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low-risk projects. Plan 1 is considered to be of low risk because its costs can be predicted quite accurately. Plan B, on the other hand, is a high-risk project because of the difficulty of predicting wage rates. What is the proper PV of costs for the better project? a. u2212$104,266.20 b. u2212$116,465.09 c. u2212$123,293.02 d. u2212$127,131.22 e. u2212$135,656.09

Q: As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.5 million at the end of Year 2, and $2 million at the end of Years 3 through 5. Within what range is the plant's IRR? a. 14u221215% b. 15u221216% c. 16u221217% d. 17u221218% e. 18u221219%

Q: Woodson Inc. has two possible projects, Project A and Project B with the following cash flows: Year Project A Project B 0 −150,000 −100,000 1 100,000 45,000 2 105,000 65,000 3 40,000 80,000 At what required rate of return do the two projects have the same net present value (NPV)? (In other words, what is the "crossover rate" of the projects' NPV profiles?) a. 10.3% b. 13.5% c. 15.8% d. 21.7% e. 34.8%

Q: Ryngaert Industries uses the NPV method to establish its capital budget, and it is now considering two mutually exclusive projects whose after-tax cash flows are shown below: Year Project S Project L 0 u2212$5,000 u2212$7,000 1 2,000 900 2 2,500 4,000 3 2,500 5,000 If the required rate of return is below some rate, then Project L should be selected, whereas if the required rate of return is above that rate then Project S should be selected. What is the "crossover" rate at which the NPV profiles of these projects intersect? a. 5.21% b. 7.55% c. 11.88% d. 15.66% e. 18.14%

Q: A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company's required rate of return is 12 percent. What is the IRR of the better project? (Hint: Note that the better project may or may not be the one with the higher IRR.) a. 13.09% b. 12.00% c. 17.46% d. 13.88% e. 12.53%

Q: Your company is planning to open a new gold mine which will cost $3.0 million to build, with the expenditure occurring at the end of the year three years from today. The mine will bring year-end after-tax cash inflows of $2.0 million at the end of the two succeeding years, and then it will cost $0.5 million to close down the mine at the end of the third year of operation. What is this project's IRR? a. 14.36% b. 10.17% c. 17.42% d. 12.70% e. 21.53%

Q: Given the following net cash flows, determine the IRR of the project: Time Net cash flow 0 $1,520 1 u22121,000 2 u22121,500 3 500 a. 36% b. 32% c. 28% d. 24% e. 20%

Q: Foster Industries has a project which has the following cash flows: Year Cash Flow 0 u2212$300.00 1 100.00 2 125.43 3 90.12 4 ? What cash flow will the project have to generate in the fourth year in order for the project to have an internal rate of return of 15 percent? a. $15.55 b. $58.95 c. $100.25 d. $103.10 e. $150.75

Q: Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your required rate of return is 10 percent. How much value will your firm sacrifice if it selects the project with the higher IRR? Project S: Project L: a. $243.43 b. $291.70 c. $332.50 d. $481.15 e. $535.13

Q: An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.6 years. What is the project's internal rate of return? a. 11.18% b. 12.05% c. 13.47% d. 14.66% e. 15.89%

Q: A company is analyzing two mutually exclusive projects, S and L, whose cash flows are shown below: The company's required rate of return is 12 percent, and it can get an unlimited amount of funds at that rate. What is the IRR of the better project, i.e., the project which the company should choose if it wants to maximize the price of its stock? a. 12.00% b. 15.53% c. 18.62% d. 19.08% e. 20.46%

Q: Refer to Truck Acquisition. The truck's required rate of return is 10 percent. What is its NPV? a. u2212$1,547 b. u2212$562 c. $0 d. $562 e. $1,034

Q: Refer to Truck Acquisition. What is the terminal (nonoperating) cash flow at the end of Year 3? a. $10,000 b. $12,000 c. $15,680 d. $16,000 e. $18,000

Q: Refer to Truck Acquisition. What is the supplemental operating cash flow in Year 1? a. $17,820 b. $18,254 c. $19,920 d. $20,121 e. $21,737

Q: Refer to Truck Acquisition. What is the initial investment outlay for the truck? (That is, what is the Year 0 net cash flow?) a. −$50,000 b. −$52,600 c. −$55,800 d. −$62,000 e. −$65,000

Q: Refer to Real Time Inc. What is the project's NPV? a. $2,622 b. $2,803 c. $2,917 d. $5,712 e. $6,438

Q: Refer to Real Time Inc. What is the terminal cash flow (i.e., CF at t = 3)? a. $18,120 b. $19,000 c. $21,000 d. $25,000 e. $27,000

Q: Refer to Real Time Inc. What is the supplemental operating cash flow in Year 2? a. $9,000 b. $10,240 c. $11,687 d. $13,453 e. $16,200

Q: Refer to Real Time Inc. What is the initial investment outlay required at t = 0? a. −$42,000 b. −$40,000 c. −$38,600 d. −$37,600 e. −$36,600

Q: California Mining is evaluating the introduction of a new ore production process. Two alternatives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Production Process B also requires an initial investment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B? a. 8% b. 10% c. 12% d. 14% e. 16%

Q: Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 5 years ago at a cost of $20,000, and it is being depreciated on a straight line basis to a zero salvage value over a 10-year life. The current market value of the old machine is $14,000. The new machine, which falls into the MACRS 5-year class, has an estimated life of 5 years, it costs $30,000, and Tech plans to sell the machine at the end of the 5th year for $1,000. The new machine is expected to generate before-tax cash savings of $3,000 per year. The company's tax rate is 40 percent. What is the IRR of the proposed project? a. 4.1% b. 2.2% c. 0.0% d. u22121.5% e. u22123.3%

Q: Mom's Cookies Inc. is considering the purchase of a new cookie oven. The original cost of the old oven was $30,000; it is now 5 years old, and it has a current market value of $13,333.33. The old oven is being depreciated over a 10-year life towards a zero estimated salvage value on a straight line basis, resulting in a current book value of $15,000 and an annual depreciation expense of $3,000. The old oven can be used for 6 more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new oven whose cost is $25,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new oven are $4,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a 5-year life, and the required rate of return is 10 percent. Assume a 40 percent tax rate. What is the net present value of the new oven? a. −$2,418 b. −$1,731 c. $1,568 d. $163 e. $1,731

Q: Meals on Wings Inc. supplies prepared meals for corporate aircraft (as opposed to public commercial airlines), and it needs to purchase new broilers. If the broilers are purchased, they will replace old broilers purchased 10 years ago for $105,000 and which are being depreciated on a straight line basis to a zero salvage value (15-year depreciable life). The old broilers can be sold for $60,000. The new broilers will cost $200,000 installed and will be depreciated using MACRS over their 5-year class life; they will be sold at their book value at the end of the 5th year. The firm expects to increase its revenues by $18,000 per year if the new broilers are purchased, but cash expenses will also increase by $2,500 per year. If the firm's required rate of return is 10 percent and its tax rate is 34 percent, what is the NPV of the broilers? a. −$61,019 b. $17,972 c. $28,451 d. −$44,553 e. $5,021

Q: Klott Company encounters significant uncertainty with its sales volume and price in its primary product. The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget. The base case, best case, and worse case scenarios and probabilities are provided in the table below. What is Klott's expected NPV, standard deviation of NPV, and coefficient of variation of NPV? Probability of Outcome Unit Sales Volume Sales Price NPV (In Thousands) Worst case 0.30 6,000 $3,600 u2212$ 6,000 Base case 0.50 10,000 4,200 + 13,000 Best case 0.20 13,000 4,400 + 28,000 a. Expected NPV = $35,000; u03c3NPV = 17,500; CVNPV = 2.0. b. Expected NPV = $35,000; u03c3NPV = 11,667; CVNPV = 0.33. c. Expected NPV = $10,300; u03c3NPV = 12,083; CVNPV = 1.17. d. Expected NPV = $13,900; u03c3NPV = 8,476; CVNPV = 0.61. e. Expected NPV = $10,300; u03c3NPV = 13,900; CVNPV = 1.35.

Q: Alabama Pulp Company (APC) can control its environmental pollution using either "Project Old Tech" or "Project New Tech." Both will do the job, but the actual costs involved with Project New Tech, which uses unproved, new state-of-the-art technology, could be much higher than the expected cost levels. The cash outflows associated with Project Old Tech, which uses standard proven technology, are less riskyu23afthey are about as uncertain as the cash flows associated with an average project. APC's required rate of return for average risk projects normally is set at 12 percent, and the company adds 3 percent for high risk projects but subtracts 3 percent for low risk projects. The two projects in question meet the criteria for high and average risk, but the financial manager is concerned about applying the normal rule to such cost-only projects. You must decide which project to recommend, and you should recommend the one with the lower PV of costs. What is the PV of costs of the better project? Cash Outflows Years: 0 1 2 3 4 Project New Tech 1,500 315 315 315 315 Project Old Tech 600 600 600 600 600 a. 2,521 b. 2,399 c. 2,457 d. 2,543 e. 2,422

Q: The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12 percent. Further, Project A costs $15,000, and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of $5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of $4,000 for each of the 6 years. Project B costs $14,815 and would also be depreciated using MACRS. B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of $5,100 each year for 6 years. The Unlimited's marginal tax rate is 40 percent. What risk-adjusted discount rate will equate the NPV of Project B to that of Project A? a. 15% b. 16% c. 18% d. 20% e. 12%

Q: Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000. The cash flow figures for each project are shown below: Period Project A Project B 1 $2,000 $3,000 2 2,500 2,600 3 2,250 2,900 Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted discount rate when evaluating a high-risk project. The rate used for average risk projects is 12 percent. Which of the following statements regarding the NPVs for Models A and B is most correct? a. NPVA = $380; NPVB = $1,815. b. NPVA = $197; NPVB = $1,590. c. NPVA = $380; NPVB = $1,590. d. NPVA = $5,380; NPVB = $6,590. e. None of the above statements is correct.

Q: Virus Stopper Inc., a supplier of computer safeguard systems, uses a required rate of return of 12 percent to evaluate average risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $71,104. Project B, of less than average risk, will produce cash flows of $146,411 at the end of Years 3 and 4 only. Virus Stopper should accept a. B with a NPV of $10,001. b. Both A and B because both have NPVs greater than zero. c. B with a NPV of $8,042. d. A with a NPV of $7,177. e. A with a NPV of $15,968.

Q: An all-equity firm is analyzing a potential project which will require an initial, after-tax cash outlay of $50,000 and after-tax cash inflows of $6,000 per year for 10 years. In addition, this project will have an after-tax salvage value of $10,000 at the end of Year 10. If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, then what is the project's NPV? a. $13,210 b. $4,905 c. $7,121 d. u2212$6,158 e. u2212$12,879

Q: Louisiana Enterprises, an all-equity firm, is considering a new capital investment. Analysis has indicated that the proposed investment has a beta of 0.5 and will generate an expected return of 7 percent. The firm currently has a required return of 10.75 percent and a beta of 1.25. The investment, if undertaken, will double the firm's total assets. If rRF = 7 percent and the market return is 10 percent, should the firm undertake the investment? (Choose the best answer.) a. Yes; the expected return of the asset (7%) exceeds the required return (6.5%). b. Yes; the beta of the asset will reduce the risk of the firm. c. No; the expected return of the asset (7%) is less than the required return (8.5%). d. No; the risk of the asset (beta) will increase the firm's beta. e. No; the expected return of the asset is less than the firm's required return, which is 10.75%.

Q: Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. If the purchase is made, Carolina will be 50 percent larger than before. Currently, Carolina's stock has a beta of 1.2 and the return required is 15.2 percent. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, should Carolina make the investment? a. No; the expected return is less than the required return. b. No; the IRR is less than the appropriate required rate of return. c. Yes; the IRR is greater than the appropriate required rate of return. d. Yes; the expected return is greater than the required return. e. Yes; the project's risk/return combination lies above the SML.

Q: Two projects being considered are mutually exclusive and have the following projected cash flows: Year Project A Project B 0 u2212$50,000 u2212$50,000 1 15,625 0 2 15,625 0 3 15,625 0 4 15,625 0 5 15,625 99,500 If the required rate of return on these projects is 10 percent, which would be chosen and why? a. Project B because of higher NPV. b. Project B because of higher IRR. c. Project A because of higher NPV. d. Project A because of higher IRR. e. Neither, because both have IRRs less than the required return.

Q: As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Year Project X Project Z 0 u2212$100,000 u2212$100,000 1 50,000 10,000 2 40,000 30,000 3 30,000 40,000 4 10,000 60,000 If Denver's required rate of return is 15 percent, you would choose? a. Neither project. b. Project X, since it has the higher IRR. c. Project Z, since it has the higher NPV. d. Project X, since it has the higher NPV. e. Project Z, since it has the higher IRR.

Q: You have recently accepted a one year employment term by a firm. The firm has given you the option of receiving your salary as a lump sum value of $30,000 at the end of the year or as 12 monthly payments of $2,400 starting one month after you start work. If your relevant discount rate is 2 percent per month, then which salary options would you prefer? (Ignore taxes, risk, and consumption needs.) Choose the best answer. a. The lump sum payment, since it has the larger future value. b. Monthly payments, since you do not have to wait so long to receive your money. c. Either one, since they have the same present value. d. The lump sum payment, since it has the larger present value. e. Monthly payments, since it has the larger present value.

Q: Becker Glass Corporation Becker Glass Corporation expects to have earnings before interest and taxes during the coming year of $1,000,000, and it expects its earnings and dividends to grow indefinitely at a constant annual rate of 12.5 percent. The firm has $5,000,000 of debt outstanding bearing a coupon interest rate of 8 percent, and it has 100,000 shares of common stock outstanding. Historically, Becker has paid 50 percent of net earnings to common shareholders in the form of dividends. The current price of Becker's common stock is $40, but it would incur a 10 percent flotation cost if it were to sell new stock. The firm's tax rate is 40 percent. Refer to Becker Glass Corporation. What is Becker's cost of newly issued stock? a. 16.0% b. 16.5% c. 17.0% d. 17.5% e. 18.0%

Q: Takeda Enterprises has four investment opportunities with the following costs (all costs are paid at t = 0) and estimated internal rates of return (IRR): Project Cost IRR A $1,000 15.0% B 2,000 12.0 C 1,000 10.5 D 3,000 10.0 The company wants to maintain a capital structure of 50 percent debt and 50 percent equity. The company anticipates that it can issue up to $2,000 of debt at an interest rate of 10 percent; if it issues more than $2,000 of debt its interest rate will increase to 11 percent. The company's stock price (P0) is currently $90 per share, its expected dividend () is $6, and its dividend growth rate is 5 percent. The company expects to have $3,000 in retained earnings and its tax rate is 30 percent. What percentage flotation cost makes the net present value of accepting Project D zero? (Hint: Project D will be selected only after Projects A, B, and C have been selected.) a. 18.77% b. 22.12% c. 24.10% d. 27.33% e. 30.25%

Q: Anderson Company has four investment opportunities with the following costs (all costs are paid at t = 0) and estimated internal rates of return (IRR): Project Cost IRR A $2,000 16.0% B 3,000 14.5 C 5,000 11.5 D 3,000 9.5 The company has a target capital structure that consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock. The company has $1,000 in retained earnings. The company expects its year-end dividend to be $3.00 per share (i.e., = $3.00). The dividend is expected to grow at a constant rate of 5 percent a year. The company's stock price is currently $42.75. If the company issues new common stock, the company will pay its investment bankers a 10 percent flotation cost. The company can issue corporate bonds with a yield to maturity of 10 percent. The company is in the 35 percent tax bracket. How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects? a. 7.75% b. 8.90% c. 10.46% d. 11.54% e. 12.68%

Q: Heavy Metal Corp. is a steel manufacturer that finances its operations with 40 percent debt, 10 percent preferred stock, and 50 percent equity. Its net income is $100 million and it has a payout ratio of 35 percent. The interest rate on the company's debt is 11 percent. The preferred stock pays an annual dividend of $2 and sells for $20 a share. The company's common stock trades at $30 a share and its current dividend (D0) of $2 a share is expected to grow at a constant rate of 8 percent per year. The flotation cost of external equity is 15 percent of the dollar amount issued, while the flotation cost on preferred stock is 10 percent. The company estimates that its WACC is 12.30 percent. Assume that the company is raising $150 million in total capital. What is the company's tax rate? a. 30.33% b. 32.87% c. 35.75% d. 38.12% e. 40.98%

Q: Your company's stock sells for $50 per share, its last dividend (D0) was $2.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock. Net income for the coming year is expected to be $500,000 and the firm's payout ratio is 60 percent. The firm's common equity ratio is 30 percent and it has no preferred stock outstanding. The firm can borrow up to $300,000 at an interest rate of 7 percent; any additional debt will have an interest rate of 9 percent. Your company's tax rate is 40 percent. If the firm has a capital budget of $1,000,000, what is the WACC for the last dollar of capital the company raises? a. 3.78% b. 6.76% c. 9.94% d. 11.81% e. 13.25%