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fin315 final exam

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Question;Question 1;Table 9.2;A firm has determined its optimal structure which is composed of the following;sources and target market value proportions.;Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond;for $1,050. A flotation cost of 2 percent of the face value would be required;in addition to the premium of $50.Common Stock: A firm's common stock is currently selling for $75;per share. The dividend expected to be paid at the end of the coming year is;$5. Its dividend payments have been growing at a constant rate for the last;five years. Five years ago, the dividend was $3.10. It is expected that to;sell, a new common stock issue must be underpriced $2 per share and the firm;must pay $1 per share in flotation costs. Additionally, the firm has a marginal;tax rate of 40 percent.;The firm's cost of a new issue of common stock is ________. (See Table 9.2);Answer;10.2 percent;14.3 percent;16.7 percent;17.0;percent;Table 9.2;A firm has determined its optimal structure which is composed of the following;sources and target market value proportions.;Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond;for $1,050. A flotation cost of 2 percent of the face value would be required;in addition to the premium of $50.Common Stock: A firm's common stock is currently selling for $75;per share. The dividend expected to be paid at the end of the coming year is;$5. Its dividend payments have been growing at a constant rate for the last;five years. Five years ago, the dividend was $3.10. It is expected that to;sell, a new common stock issue must be underpriced $2 per share and the firm must;pay $1 per share in flotation costs. Additionally, the firm has a marginal tax;rate of 40 percent.;The firm's before-tax cost of debt is ________. (See Table 9.2);Answer;7.7 percent;10.6 percent;11.2 percent;12.7 percent;Table 10.4;A firm is evaluating two projects that are mutually exclusive with initial;investments and cash flows as follows;The new financial analyst does not like the payback approach (Table 10.4) and;determines that the firm's required rate of return is 15 percent. His;recommendation would be to;Answer;accept projects A and B.;accept project A and reject B.;reject;project A and accept B.;reject both.;What is the payback period for Tangshan Mining company's new project if;its initial after tax cost is $5,000,000 and it is expected to provide;after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2;$700,000 in year 3 and $1,800,000 in year 4?;Answer;4.33 years;3.33 years;2.33 years;None of these;Should Tangshan Mining company accept a new project if its maximum;payback is 3.25 years and its initial after tax cost is $5,000,000 and it is;expected to provide after-tax operating cash inflows of $1,800,000 in year 1;$1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?;Answer;Yes.;No.;It depends.;None of these;Which capital budgeting method is most useful for evaluating the;following project? The project has an initial after tax cost of $5,000,000 and;it is expected to provide after-tax operating cash flows of $1,800,000 in year;1, -$2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?;Answer;NPV;IRR;Payback;Two of these;A firm has common stock with a market price of $100 per share and an;expected dividend of $5.61 per share at the end of the coming year. A new issue;of stock is expected to be sold for $98, with $2 per share representing the;underpricing necessary in the competitive capital market. Flotation costs are;expected to total $1 per share. The dividends paid on the outstanding stock over;the past five years are as follows;The cost of this new issue of common stock is;Answer;5.8 percent.;7.7 percent.;10.8 percent.;12.8 percent.;Evaluate the following projects using the payback method assuming a rule;of 3 years for payback.;Answer;Project A can be accepted because the payback period is 2.5 years but;Project B cannot be accepted because its payback period is longer than 3;years.;Project B should be accepted;because even thought the payback period is 2.5 years for project A and 3.001;project B, there is a $1,000,000 payoff in the 4th year in Project B.;Project B should be accepted;because you get more money paid back in the long run.;Both projects can be accepted;because the payback is less than 3 years.;Question 9;Which of the following capital budgeting techniques ignores the;time value of money?;Answer;Payback;Net present;value;Internal rate;of return;Two of these;Table 9.2;A firm has determined its optimal structure which is composed of the following;sources and target market value proportions.;Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond;for $1,050. A flotation cost of 2 percent of the face value would be required;in addition to the premium of $50.Common Stock: A firm's common stock is currently selling for $75;per share. The dividend expected to be paid at the end of the coming year is;$5. Its dividend payments have been growing at a constant rate for the last;five years. Five years ago, the dividend was $3.10. It is expected that to;sell, a new common stock issue must be underpriced $2 per share and the firm;must pay $1 per share in flotation costs. Additionally, the firm has a marginal;tax rate of 40 percent.;Assuming the firm plans to pay out all of its earnings as dividends, the;weighted average cost of capital is ________. (See Table 9.2);Answer;9.6 percent;10.9 percent;11.6 percent;12.1 percent;Question 11;What is the NPV for the following project if its cost of capital is 15;percent and its initial after tax cost is $5,000,000 and it is expected to;provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in;year 2, $1,700,000 in year 3 and $1,300,000 in year 4?;Answer;$1,700,000;$371,764;($137,053);None of these;A firm is evaluating two independent projects utilizing the internal;rate of return technique. Project X has an initial investment of $80,000 and;cash inflows at the end of each of the next five years of $25,000. Project Z;has a initial investment of $120,000 and cash inflows at the end of each of the;next four years of $40,000. The firm should;Answer;accept both if the cost of capital;is at most 15 percent.;accept only Z if the cost of;capital is at most 15 percent.;accept only X if the cost of capital is at most 15 percent.;None of these;Question 13;When the net present value is negative, the internal rate of return is;the cost of capital.;Answer;greater than;greater than or equal to;less than;equal to;There is sometimes a ranking problem among NPV and IRR when selecting;among mutually exclusive investments. This ranking problem only occurs when;Answer;the NPV is greater than the;crossover point.;the NPV is less than the crossover;point.;the cost of capital is to the right;of the crossover point.;the cost of capital is to the left of the crossover point.;Consider the following projects, X and Y where the firm can only choose;one. Project X costs $600 and has cash flows of $400 in each of the next 2;years. Project B also costs $600, and generates cash flows of $500 and $275 for;the next 2 years, respectively. Which investment should the firm choose if the;cost of capital is 25 percent?;Answer;Project X;Project Y;Neither;Not enough information to tell;What is the IRR for the following project if its initial after tax cost;is $5,000,000 and it is expected to provide after-tax operating cash inflows of;$1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000;in year 4?;Answer;15.57%;0.00%;13.57%;None of these;able 9.1;A firm has determined its optimal capital structure which is composed of the;following sources and target market value proportions.;Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond;for $960. A flotation cost of;2 percent of the face value would be required in addition to the discount of;$40.Preferred Stock: The firm has determined it can issue preferred;stock at $75 per share par value. The stock will pay a $10 annual dividend. The;cost of issuing and selling the stock is $3 per share.Common Stock: A firm's common stock is currently selling for $18;per share. The dividend expected to be paid at the end of the coming year is;$1.74. Its dividend payments have been growing at a constant rate for the last;four years. Four years ago, the dividend was $1.50. It is expected that to;sell, a new common stock issue must be underpriced $1 per share in floatation;costs. Additionally, the firm's marginal tax rate is 40 percent.;The weighted average cost of capital up to the point when retained earnings are;exhausted is ________. (See Table 9.1);Answer;7.5 percent;8.65 percent;10.4 percent;11.0 percent;When evaluating projects using internal rate of return;Answer;projects having lower early-year;cash flows tend to be preferred at higher discount rates.;projects having higher early-year;cash flows tend to be preferred at higher discount rates.;projects having higher early-year cash flows tend to be preferred at;lower discount rates.;the discount rate and magnitude of;cash flows do not affect internal rate of return.;Table 9.1;A firm has determined its optimal capital structure which is composed of the;following sources and target market value proportions.;Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond;for $960. A flotation cost of;2 percent of the face value would be required in addition to the discount of;$40.Preferred Stock: The firm has determined it can issue preferred;stock at $75 per share par value. The stock will pay a $10 annual dividend. The;cost of issuing and selling the stock is $3 per share.Common Stock: A firm's common stock is currently selling for $18;per share. The dividend expected to be paid at the end of the coming year is;$1.74. Its dividend payments have been growing at a constant rate for the last;four years. Four years ago, the dividend was $1.50. It is expected that to;sell, a new common stock issue must be underpriced $1 per share in floatation;costs. Additionally, the firm's marginal tax rate is 40 percent.;The firm's before-tax cost of debt is ________. (See Table 9.1);Answer;7.7 percent;10.6 percent;11.2 percent;12.7 percent;able 9.1;A firm has determined its optimal capital structure which is composed of the;following sources and target market value proportions.;Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond;for $960. A flotation cost of;2 percent of the face value would be required in addition to the discount of;$40.Preferred Stock: The firm has determined it can issue preferred;stock at $75 per share par value. The stock will pay a $10 annual dividend. The;cost of issuing and selling the stock is $3 per share.Common Stock: A firm's common stock is currently selling for $18;per share. The dividend expected to be paid at the end of the coming year is;$1.74. Its dividend payments have been growing at a constant rate for the last;four years. Four years ago, the dividend was $1.50. It is expected that to;sell, a new common stock issue must be underpriced $1 per share in floatation;costs. Additionally, the firm's marginal tax rate is 40 percent.;The firm's cost of retained earnings is ________. (See Table 9.1);Answer;10.2 percent;13.9 percent;12.4 percent;13.6 percent

 

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