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FIN multiple choice questions




Question;Problem 1Big Bucks Mines is considering a project with start-up costs of $16 million,expected after tax cash flows of $2 million per year for 30 years, and a shutdown cost of $45 million to be paid to a contractor at the start of year 31.BBM has a cost of capital (discount rate) of 9.5% (EAR).For what range of IRR does the project have positive NPV?Answera. 0.000% to 10.333%b. 0.211% to 10.300%c. 0.255% to 10.318%d. 0.000% to 15.427%e. 0.000% to 3.574%f. 3.574% to 10.456%g. All RRR greater than 0%h. All RRR greater than 1%Question 2 Multiple ChoiceProblem 1 Continued...Is the project worthwhile for BBM?Answera. Yesb. Noc. Insufficient Information 2Question 3 Multiple ChoiceProblem 1 Continued...The government, annoyed by several mining companies going broke before paying theclean-up costs, introduced new legislation requiring new mines to pay an equal amounteach year into a trust fund in order to fully fund the estimated clean-up costs. The trustfund pays a guaranteed rate of interest of 8% (EAR).What will be BBM's annual payment?Answera. $0.397 Millionb. $1.5 Millionc. $0.472 Milliond. $0.514 Millione. $0.433 Millionf. $0.431 Milliong. $0.365 Millionh. Insufficient informationi. $3.997 MillionQuestion 4 Multiple ChoiceProblem 1 Continued...Given that the new legislation has been passed. What is the new NPV of BBM's project?Answera. -$0.587 Millionb. $0.0815 Millionc. -$0.237 Milliond. $0.713 Millione. -$0.802 Millionf. -$0.741 Milliong. -$3.759 Millionh. $0.587 Millioni. -$35.639 Millionj. Insufficient information 3Question 5 Multiple ChoiceProblem 1 Continued...If you have solved question 4 correctly, you will notice that the new regulation has leadto a decline in the NPV. Why has the NPV declined?Answera. Because the new legislation requires firms to invest in the trust fundat less than their cost of capital.b. Because government interference is always bad.c. Because the Cleanup exercise imposes costs (without conferring anybenefits) on the firm.d. Because firms don't get any time value on the trust fund payments.e. Because the time values of the payments are now captured by thetrust fund.f. Because BBM's cost of capital is too high.g. Insufficient information to answer this question.Question 6 Multiple ChoiceProblem 2Clean Air Inc. is considering two mutually exclusive projects. Project A requires a$15,000 machine tool (CCA class 8, 20%) and will increase Clean Air?s sales by $10,000per year for 4 years. After 4 years the machine tool will have no salvage value. Project Brequires machinery costing $30,000 (CCA class 8, 20%), and will increase sales by$17,500 per year for 7 years, with no salvage value. Both of these projects can berepeated indefinitely. Clean Air has a cost of capital (discount rate) of 12% (EAR) and amarginal tax rate of 33%.What are the present values of the CCA tax shields for project A?Answer a. $2,928.01b. -$2,928.01c. $3,000.00d. $2,082.14e. $1,027.36f. $1,701.56g. $3,549.11h. $3,836.87 4Question 7 Multiple ChoiceProblem 2 Continued...What are the present values of the CCA tax shields for project B?Answera. $5,856.03b. -$5,856.03c. $6,000.00d. $4,164.29e. $2,054.72f. $3,403.13g. $7,098.21h. $7,673.75Question 8 Multiple ChoiceProblem 2 Continued...What is the NPV of the project A?Answera. $15,373.49b. -$2,048.73c. $32,422.23d. $2,422.23e. $8,350.24f. $11,380.94g. $8,808.22h. $8,278.25Question 9 Multiple ChoiceProblem 2 Continued...What is the NPV of the project B?Answera. $29,366.07b. $49,865.74c. $2,211.72d. $77,654.02e. $17,654.02f. $29,510.05g. $38,056.88h. $27,565.43 5Question 10 Multiple ChoiceProblem 2 Continued...What is the EAA (Equivalent Annual Annuity) of the project A?Note: The EAC calculation annualizes the total cost of a project over its life. The sametype of calculation can be used to annualize any amount, such as a project's NPV. Insuch cases, the amount is called an equivalent annual benefit (EAA).Answer a. $2,725.49b. $5,061.48c. $2,723.11d. -$674.51e. $10,674.51f. $797.48g. $2,749.18h. $3,746.99i. $2,899.96Question 11 Multiple ChoiceProblem 2 Continued...What is the EAA of the project B?Answera. $6,434.63b. $10,926.47c. $484.63d. $17,015.37e. $6,439.93f. $6,466.18g. $8,338.94h. $6,040.07i. $4,195.15Question 12 Multiple ChoiceProblem 2 Continued...Clean Air managers should choose ____________Answera. Project Ab. Project Bc. Either of the two projectsd. None of the two projectse. Insufficient information to answer this question 6Question 13 Multiple ChoiceProblem 3Proctor and Pimple (PP) has 50,000 five-year 7.5% semi-annual coupon bonds with a yield-tomaturity of 8%, 1,000,000 shares of common stock, with? = 1.125, priced at $50 per share,and 25,000 shares of 8.5% preferred stock, with face value equal to $100, priced at $90 pershare. Your financial analysts report the effective annual yield on short-term governmentbonds as 4% and the expected return on the S&P/TSX Composite Index as 10%. Thecorporate tax rate is 40%.You are investigating the feasibility of a new line of cosmetics for PP. The cosmeticsbusiness is a tricky one: the demand on these luxurious products is highly volatile. Yourmarket analysts have conducted a consumer survey, which cost the firm $20,000, and forecastthe demand for the new product line under high and low demand scenarios. The variable costper product unit is $80, while total fixed costs are estimated as $100,000 per year. Thefollowing table summarizes the projected demand schedule:Projected Sales (Units)Year High Demand Low Demand1 10,000 7,5002 12,000 8,0003 12,000 8,0004 11,000 5,0005 10,000 5,000Unit Price $120 $100It costs $750,000 to buy the equipment necessary to begin production. The equipment falls inClass 10 for depreciation purposes, and the CCA rate is 30%. The equipment will eventuallybe worth $50,000 in five years, at which time, the product line will be abandoned (but youwill continue to have Class 10 assets in other divisions).The project requires a $50,000 upfront investment in inventory. The management estimatesthat, at the end of each year, total inventory will be 10% of sales revenue (for that year), whileaccounts receivable will equal 5% of sales revenue, and accounts payable will equal 6.25% ofvariable costs.What is the required rate of return for PP?Answera) 0.0774b) 0.0784c) 0.0787d) 0.0789e) 0.09477Question 14 Multiple ChoiceProblem 3 (Continued)What is the NPV of the project in the high demand scenario?Answera) $326,465.62b) $286,162.72c) $282,686.82d) $281,144.73e) $230,640.31Question 15 Multiple ChoiceProblem 3 (continued)What is the NPV of the project in the low demand scenario?Answera) -$373,222.68b) -$429,734.84c) -$430,950.91d) -$431,490.28e) -$449,108.79Question 16 Multiple ChoiceProblem 3 (continued)Suppose that the firm has just approved the project. Assuming that the demand couldbe either ?high? or ?low? over the life of the project (i.e. there are two possibleoutcomes), the probability of the high demand scenario must at least be ?Answer a) 0.9114b) 0.6055c) 0.6048d) 0.6039e) 0.6003Question 17 Multiple ChoiceProblem 4The weighted average cost of capital for ACME Enterprises is 9%. The typicalACME bond pays semi-annual coupons at a rate of 10% and has a remaining maturityof ten years. The firm?s preferred stock has a par value of $100 and pays 5% dividend.The corporate tax rate (Tc) is 35%, while the effective annual yield on short-termgovernment bonds and expected return on the market portfolio are 3% and 10%,respectively. You are also given the following information about ACME?s capitalstructure:8Source Securities Price Value wi RiDebt 50,000 $62,500,000 0.45Equity 1,000,000 $ 75.00Preferred 25,000 0.01 0.09What is the yield-to-maturity on ACME bonds?Answer a) 9.00%b) 6.67%c) 6.55%d) 6.52%e) 3.28%Question 18 Multiple Choice 1 pointsProblem 4 (continued)What is the beta of ACME stock?Answera) 1.4132b) 1.2165c) 1.1354d) 0.9892e) 0.7948Question 19 Multiple Choice 1 pointsProblem 4 (continued)What is the price of ACME preferred stock?Answera) $105.00b) $100.00c) $95.00d) $91.74e) $55.56


Paper#48021 | Written in 18-Jul-2015

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