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Finance Corporate | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED PASS | GRADED A | LATEST UPDATE 2024-2025 WITH 200+ QUESTIONS

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Download Finance Corporate | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED PASS | GRADED A and more Exams Finance in PDF only on Docsity! Finance Corporate | ACCURATE QUESTIONS AND DETAILED ANSWERS | GUARANTEED PASS | GRADED A | LATEST UPDATE 2024-2025 WITH 200+ QUESTIONS Why is the quick ratio considered by some to be a better measure of liquidity than the current ratio? - CORRECT ANS-It leaves out the least liquid current asset from the numerator of the ratio. Which of the following is true of a firm that has no debt in its capital structure? - CORRECT ANS-Its return on equity (ROE) will be equal to its return on asset (ROA). The DuPont equation shows that a firm's return on equity (ROE) is determined by three factors: - CORRECT ANS-net profit margin, total asset turnover, and the equity multiplier. Last year Gray Corp. had net sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-capital ratio was 45.0%. The firm uses only debt and common equity as financing. Based on the DuPont equation, what was the ROE? - CORRECT ANS-13.82% Blossom Corp. has total current assets of $ 14,772,000, current liabilities of $ 4,208,000, and a quick ratio of 0.80. How much inventory does it have? - CORRECT ANS-11405600 Wildhorse Company has total assets of $5,500,000,000 and a debt ratio of 38.0 percent. Calculate the company's debt-to-equity ratio and equity multiplier - CORRECT ANS-Debt to Equity: .61 Equity Multiplier: 1.61 Wildhorse, Inc., has net income of $ 13,600,000 on net sales of $ 425,000,000.The company has total assets of $ 125,000,000 and stockholders' equity of $ 40,000,000. Use the extended DuPont identity to find the return on assets and return on equity for the firm - CORRECT ANS-Profit Margin: 3.2 Total Assets Turnover: 3.4 times ROA: 10.88% ROE: 34% The time-value-of-money concept assumes that: - CORRECT ANS-people accept less money to reduce the time they must wait. Which of the following situations will result in an increase in the future value of an investment? - CORRECT ANS-An increase in the rate of interest The future value of $200,000 invested at a 7% annual rate, compounded quarterly for 3 years is _____. (Do not round your intermediate calculations. Round the final answer to the nearest two decimal places.) - CORRECT ANS-246,287.86 Which one of the following processes do we use when calculating the price of an asset? - CORRECT ANS-Discounting. Time value of money refers to the concept of: - CORRECT ANS-what the value of the stream of future cash flows is today. about the time value of money concept is true? In computing the present and future value of multiple cash flows: - CORRECT ANS-each cash flow is discounted or compounded at the same rate. Anna will receive $15,000 from a bank deposit in 2 years which has an interest rate of 3.5%. The amount of $15,000 represents the: - CORRECT ANS-future value. The present value of multiple cash flows is : - CORRECT ANS-less than the sum of the cash flows. The future value of multiple cash flows is: - CORRECT ANS-greater than the sum of the cash flows. If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called: - CORRECT ANS-an ordinary annuity. If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called: - CORRECT ANS-an annuity due. Cash flows associated with annuities are considered to be: - CORRECT ANS-a constant cash flow stream. Which of the following statements is true of amortization? - CORRECT ANS-With an amortized loan, a larger proportion of each month's payment goes toward interest in the early periods. A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called: - CORRECT ANS-a growing perpetuity. Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called: - CORRECT ANS-a growing annuity. The true cost of borrowing is the: - CORRECT ANS-effective annual rate. Which of the following equations is correct? - CORRECT ANS-Annuity due value = Ordinary value × (1+i) Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today? (Round intermediate calculations to nearest four decimals.) - CORRECT ANS-$7,152 You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.) - CORRECT ANS-$102,677 You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar. - CORRECT ANS-$13,614 A perpetuity bond pays a coupon of $136 per year and has a required rate of return of 3.5%. What is the market value of the bond? (Round the final answer to the nearest two decimals). - CORRECT ANS-$3,885.71 You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.) - CORRECT ANS-$44.44 What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.) - CORRECT ANS-$24,361 Wildhorse, Inc., management expects the company to earn cash flows of $ 12,500, $ 15,900, $ 18,600, and $ 19,500 over the next four years. If the company uses an 10 percent discount rate, what is the future value of these cash flows at the end of year 4? - CORRECT ANS-75836.50 Kenneth Clark has just purchased some equipment for his landscaping business. For this equipment he must pay the following amounts at the end of each of the next five years: $ 10,310, $ 7,890, $ 9,290, $ 12,110, and $ 11,310. If the appropriate discount rate is 6.250 percent, what is the cost in today's dollars of the equipment Kenneth purchased today? - CORRECT ANS-42292.55 The bonds that has no coupon payments but promise a single payment at maturity is: - CORRECT ANS-zerocoupon bonds. A corporate bond's coupon rate is the annual coupon payment divided by: - CORRECT ANS-the bond's face value. Debra King is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 11.0 percent. Assume annual coupon payments. What is the current value of this bond? - CORRECT ANS-593.45 Which of the following is a primary concern of a firm's creditors? - CORRECT ANS-Whether and when they will receive their entitled interest payment A common-size balance sheet presents the amounts in asset, liability, and owners' equity accounts as a - CORRECT ANS-percentage of total assets Kelvy & Sons has a current ratio of 1.2, current assets of $508,315, and inventory of $98,666. What is the firm's quick ratio? - CORRECT ANS-0.97 Contrary Computer Corp. has reported that its net income for 2010 is $2,700,000. The firm has 600,000 shares outstanding and a price-earnings ratio of 15.8 times. What is the firm's share price? - CORRECT ANS-$71.10 Last year Coral Gables Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total debt ratio was 60.0%. Based on the DuPont equation, what was the ROE? - CORRECT ANS-19% In the DuPont method of financial analysis, a decrease in total asset turnover causes ROE to - CORRECT ANS-decrease. Bobcat Industries has a net profit margin of 3%, a total asset turnover of 2 times; and a debt ratio of 40%. What is the firm's ROE? - CORRECT ANS-10% The DuPont system identifies some areas where a firm's management should focus its efforts in order to maximize the firm's ROE, which of the following is one of them? - CORRECT ANS-How efficient management is in using the firm's assets? You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is CORRECT? - CORRECT ANS-Its total assets turnover must be above the industry average. One reason ratio analysis has limitations is - CORRECT ANS-ratios depend on historical data. Shareholders analyze financial statements in order to: - CORRECT ANS-focus on the value of the stock they hold. determine the firm's profitability, their return for that period, and the dividend they are likely to receive. assess the cash flows that the firm will generate from its operations. The creditors of a firm analyze financial statements so that they can better understand the firm's: - CORRECT ANS-amount of debt. ability to generate sufficient cash flows to meet its legal obligations first and still have sufficient cash flows to meet debt repayment and interest payments. ability to meet its short-term obligations. Which of the following is NOT true of liquidity ratios? - CORRECT ANS-For manufacturing firms, quick ratios will tend to be much larger than current ratios. All else being equal, which of the following will decrease a firm's current ratio? - CORRECT ANS- An increase in accounts payable Which of the following statements is correct? - CORRECT ANS-The lower the level of a firm's debt, the lower the firm's equity multiplier. Which one of the following statements is NOT correct? - CORRECT ANS-A leveraged firm is less risky than a firm that has no leverage. Coverage ratios, like times interest earned and cash coverage ratio, allow: - CORRECT ANS-a firm's creditors to assess how well the firm will meet its interest obligations. Pedro & Co. has $720,000 of assets and is all-equity financed. The new CFO wants to use enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? - CORRECT ANS-$288,000 Pedro & Son's total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE? - CORRECT ANS-17.28% Viera Industries has net sales of $200,000, accounts receivable of $18,500, and gives its customers 25 days to pay. The industry average DSO is 27 days based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income assuming other things are held constant? - CORRECT ANS-$296.44 Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and raise the return on equity to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant? - CORRECT ANS-9.45% Your firm has an equity multiplier of 2.47. What is its debt-to-equity ratio? (Round your final answer to two decimal places.) - CORRECT ANS-1.47 Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income of $812,355. What is the firm's return on equity? Round your final answer to one decimal place. - CORRECT ANS-34.7% 1) The cost of capital used to compute the present value of a project should be the rate that can be earned on: A) the overall market portfolio. B) the sponsoring firm's return on assets. B) Covariance; Variance of the market return C) Covariance; Standard deviation of the market return D) Variance; Covariance of the security return E) Covariance; Variance of the security return - CORRECT ANS-B) Covariance; Variance of the market return 9) Assume you plot the monthly returns for a stock and also for the S&P 500. Using regression analysis, the straight line through these points that is developed by the analysis is referred to as the ________ which has a slope of ________ and an intercept of ________. A) security market line; alpha; gamma B) characteristic line; beta; alpha C) characteristic line; alpha; beta D) security market line; beta; gamma E) characteristic line; gamma; alpha - CORRECT ANS-B) characteristic line; beta; alpha 10) Companies will generally have a ________ beta if their: A) low; stock price is relatively low. B) high; sales are highly dependent on the market cycle. C) high; sales are growing at a steady rate of increase. D) high; sales are high compared to other firms in their industry. E) low; production costs are primarily fixed in nature. - CORRECT ANS-B) high; sales are highly dependent on the market cycle. 11) If a firm increases its use of both operating and financial leverage, then you should expect the firm's: A) asset beta to exceed its equity beta. B) beta of debt to exceed 1.0. C) beta to remain constant as the increased operating leverage will offset the increased financial leverage. D) equity beta to increase. E) debt beta to exceed its equity beta. - CORRECT ANS-D) equity beta to increase. 12) The beta of debt is commonly considered to be: A) equal to the market beta. B) one-half of the equity beta. C) equal to the asset beta. D) zero. E) one. - CORRECT ANS-D) zero. is ________ the beta of the common stock of the unlevered firm. A) roughly equivalent to B) significantly less than C) slightly less than D) greater than E) equal to - CORRECT ANS-D) greater than 14) The beta of a firm is more likely to be high under which two conditions? A) High cyclical business activity and low operating leverage B) High cyclical business activity and high operating leverage C) Low cyclical business activity and low financial leverage D) Low cyclical business activity and low operating leverage E) Low financial leverage and low operating leverage - CORRECT ANS-B) High cyclical business activity and high operating leverage 15) A firm with cyclical earnings is characterized by: A) revenue patterns that vary with the business cycle. B) high levels of debt in its capital structure. C) high fixed costs. D) high costs per unit. E) low contribution margins. - CORRECT ANS-A) revenue patterns that vary with the business cycle. 16) A firm with high operating leverage has: A) low fixed costs in its production process. B) high variable costs in its production process. C) high fixed costs in its production process. D) high total costs per unit. E) low total costs per unit. - CORRECT ANS-C) high fixed costs in its production process. 17) Assume LK Metals is similar to its industry with one exception; it has low fixed costs relative to all other firms in that industry. Given this, you should expect LK Metals to have: A) a lower beta than its industry. B) the same beta as the industry but a lower beta than the other firms in the industry. C) a higher beta than its industry. D) a higher beta than the industry and all the firms within that industry. E) the same beta as the industry but a higher beta than the other firms in the industry. - CORRECT ANS-A) a lower beta than its industry. 18) The use of leverage: A) increases both the asset and the equity betas. B) decreases both the asset and the equity betas. C) decreases the equity beta and increases the asset beta. D) increases the equity beta but does not affect the asset beta. E) decreases the equity beta but does not affect the asset beta. - CORRECT ANS-D) increases the equity beta but does not affect the asset beta. 26) JR's is preparing to start a new project in an industry that differs significantly from its current operations. JR's has searched and found the beta of a firm that is a good fit as a pure play for this new project. Given this good fit, why might JR's assign a higher beta to the project than the beta of the pure play? A) JR's should assign a project beta that is based on the average of JR's and the pure play firm's betas. B) The expected project revenues may be less cyclical than those of the pure play firm. C) JR's may use less debt in its operations than does the pure play firm. D) The pure play firm has more experience in the new area than JR's does. E) The project may incur flotation costs so a higher beta is warranted to offset the additional cost. - CORRECT ANS-D) The pure play firm has more experience in the new area than JR's does. 27) The cost of preferred stock: A) should be adjusted for taxes when computing WACC. B) is ignored by all firms when computing WACC. C) is generally calculated using the overall firm's beta. D) is equal to the stock's dividend yield. E) is set equal to the pretax cost of debt since it is a fixed income security. - CORRECT ANS-D) is equal to the stock's dividend yield. 28) Lewis Bros. currently has outstanding debt but has decided to issue additional debt for expansion purposes. The pretax cost of the new debt is best estimated at the ________ of the currently outstanding debt. A) original yield to maturity B) current yield to maturity C) embedded cost D) current yield E) coupon rate - CORRECT ANS-B) current yield to maturity 29) As of 2018, U.S. tax law limits the tax deduction for interest payments to 30 percent of: A) EBIT. B) EBT. C) net income. D) net revenue. E) the total interest paid. - CORRECT ANS-A) EBIT. 30) When computing WACC, you should use the: A) pretax cost of debt because most corporations pay taxes at the same tax rate. B) pretax cost of debt because it is the actual rate the firm is paying its bondholders. C) current yield because it is based on the current market price of debt. D) aftertax cost of debt because interest is partially, if not fully, tax deductible. E) pretax yield to maturity because it considers the current market price of debt. - CORRECT ANS-D) aftertax cost of debt because interest is partially, if not fully, tax deductible. 31) When computing the weighted average cost of capital, which of these are adjusted for taxes? A) Cost of equity B) Cost of preferred stock C) Both the cost of equity and the cost of preferred stock D) The costs of debt and preferred stock E) Cost of debt - CORRECT ANS-E) Cost of debt 32) All else held constant, which one of these is most apt to increase the WACC of a levered firm? A) An increase in the weight of debt B) A decrease in a firm's equity beta C) A decrease in the dividend growth rate D) A decrease in the tax rate E) An increase in the risk-free rate when the equity beta exceeds 1.0 - CORRECT ANS-D) A decrease in the tax rate 33) The weighted average cost of capital for a firm is the: A) discount rate which the firm should apply to all the projects it undertakes. B) overall rate which the firm must earn on its existing assets to maintain the value of its stock. C) rate the firm should expect to pay on its next bond issue. D) maximum rate which the firm should require on any projects it undertakes. E) rate of return that the firm's preferred stockholders should expect to earn over the long term. - CORRECT ANS-B) overall rate which the firm must earn on its existing assets to maintain the value of its stock. 34) A firm's WACC can be correctly used to discount the expected cash flows of a new project when that project will: A) have the same level of risk as the firm's current operations. B) be financed solely with new debt and internal equity. C) be managed by the firm's current managers. D) be financed based on the firm's current debt-equity ratio. E) be financed solely with internal equity. - CORRECT ANS-A) have the same level of risk as the firm's current operations. 35) When valuing a firm financed with debt and equity, the individual cash flows should be discounted using: A) the market rate of return. B) the average of the DDM and CAPM costs of equity. C) (1 + WACC)T. D) (1 + CAPM)T. E) (r − g). - CORRECT ANS-C) (1 + WACC)T. C) 12.8 percent D) 14.4 percent E) 13.6 percent - CORRECT ANS-A) 13.1 percent RS = .029 + 1.2(.114 − .029) RS = .131, or 13.1% 43) Albert's recently paid its annual dividend of $1.98 per share. At that time, the firm announced that all future dividends will be increased by 2.2 percent annually. What is the firm's cost of equity if the stock is currently selling for $28.40 a share? A) 9.33 percent B) 11.32 percent C) 10.47 percent D) 11.08 percent E) 10.06 percent - CORRECT ANS-A) 9.33 percent Rs = [$1.98(1.022)]/$28.40 + .022 Rs = .0933, or 9.33% 44) Winslow and Sons is expected to pay an annual dividend of $1.35 per share one year from now with future increases of 2.5 percent annually. The stock currently sells for $14.70 a share. What is the cost of equity? A) 13.48 percent B) 12.29 percent C) 12.60 percent D) 11.68 percent E) 13.23 percent - CORRECT ANS-D) 11.68 percent Rs = $1.35/$14.70 + .025 Rs = .1168, or 11.68% 45) The cost of equity for RJ Corporation is 8.4 percent and the debt-equity ratio is .6. The expected return on the market is 10.4 percent and the risk-free rate is 3.8 percent. Using the common assumption for the debt beta, what is the asset beta? A) .70 B) .44 C) .62 D) .67 E) .59 - CORRECT ANS-B) .44 Explanation: .084 = .038 + βEquity(.104 − .038) βEquity = .697 βAsset = (1/1.6)(.697) βAsset = .44 46) Barges has an asset beta of .57, the risk-free rate is 4.3 percent, and the market risk premium is 7.7 percent. What is the equity beta if the firm has a debt-equity ratio of .56? A) .46 B) .89 C) .74 D) .37 E) .32 - CORRECT ANS-B) .89 βEquity = .57/(1/1.56) βEquity = .89 47) HNT is an all-equity firm with a beta of .88. What will the firm's equity beta be if the firm switches to a debt-equity ratio of .35? A) .88 B) 1.23 C) .97 D) 1.19 E) 1.06 - CORRECT ANS-D) 1.19 βEquity = .88/(1/1.35) βEquity = 1.19 48) A firm has an equity beta of 1.2, the risk-free rate is 3.4 percent, the market return is 15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio is .47. If you apply the common beta assumptions, what is the firm's asset beta? A) .82 B) .61 C) .67 D) .58 E) .73 - CORRECT ANS-A) .82 βAsset = (1/1.47)(1.2) βAsset = .82 49) BG's cost of equity is 9.4 percent, the expected return on the market is 13.6 percent, and the risk-free rate is 3.8 percent. What is the firm's debt-equity ratio if its asset beta is .36? Assume there is no preferred stock. A) .52 B) .59 E) 12.6 percent - CORRECT ANS-C) 11.7 percent The pure play approach applies, so: RProject = .107 + .01 RProject = .117, or 11.7% 54) The Shoe Box pays an annual dividend of $3.80 on its preferred stock. What is the cost of preferred if the stock currently sells for $42.70 a share and the tax rate is 21 percent? A) 7.94 percent B) 11.87 percent C) 6.68 percent D) 9.39 percent E) 8.90 percent - CORRECT ANS-E) 8.90 percent RP = $3.80/$42.70 RP = .0890, or 8.90% 55) Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent. What is the aftertax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible. A) 5.37 percent B) 4.86 percent C) 4.74 percent D) 5.29 percent E) 5.13 percent - CORRECT ANS-A) 5.37 percent RD = .068(1 − .21) RD = .0537, or 5.37% 56) High Road Tours has an aftertax cost of debt of 5.1 percent at its current tax rate of 34 percent. What will its aftertax cost of debt be if the tax rate drops to 21 percent? Assume all interest is tax deductible. A) 6.10 percent B) 5.92 percent C) 6.17 percent D) 4.03 percent E) 4.47 percent - CORRECT ANS-A) 6.10 percent RD = [.051/(1 − .34)](1 − .21) RD = .0610, or 6.10% 57) Jack's Construction Co. has 80 bonds outstanding that are selling at their par value of $1,000 each. Bonds with similar characteristics are yielding a pretax 8.6 percent. The firm also has 4,000 shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. T-bill is yielding 4 percent, the market risk premium is 8 percent, and the firm's tax rate is 21 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense? A) 10.10 percent B) 11.39 percent C) 10.80 percent D) 10.65 percent E) 11.40 percent - CORRECT ANS-C) 10.80 percent Re = .04 + 1.1(.08) Re = .128 Debt = 80($1,000) Debt = $80,000 Common stock = 4,000($40) Common stock = $160,000 Total debt and equity = $80,000 + 160,000 Total debt and equity = $240,000 WACC = ($160,000/$240,000)(.128) + ($80,000/$240,000)(.086)(1 − .21) WACC = .1080, or 10.80% 58) Peter's Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105 shares of common stock outstanding at a market price of $22 a share. There are 25 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21 percent, what is the weighted average cost of capital assuming all interest is tax deductible? A) 9.68 percent B) 8.54 percent C) 8.69 percent D) 9.52 percent E) 9.45 percent - CORRECT ANS-D) 9.52 percent Debt = $1,500(.98) Debt = $1,470 Preferred stock = 25($45) Preferred stock = $1,125 Common stock = 105($22) Common stock = $2,310 Total debt and equity = $1,470 + 1,125 + 2,310 Total debt and equity = $4,905 WACC = ($2,310/$4,905)(.124) + ($1,125/$4,905)(.08) + [($1,470/$4,905)(.078)(1 − .21) WACC = .0952, or 9.52% E) $1,279,623 - CORRECT ANS-E) $1,279,623 WACC = .60(.114) + .40(.062) WACC = .0932, or 9.32% PV0 = $72,000/1.0932 + $78,000/1.09322 + $84,000/1.09323 + [$84,000(1.032)]/(.0932 − .032)]/1.09323 PV0 = $1,279,623 63) The expected net cash flows of Advantage Leasing for the next three years are $42,000, $49,000, and $64,000, respectively. After three years, the growth rate of these cash flows will be a constant 2 percent annually. The WACC is 8 percent. What is the present value of the terminal value? A) $881,822 B) $863,689 C) $959,259 D) $910,444 E) $828,406 - CORRECT ANS-B) $863,689 PVTerminal value = [$64,000(1.02)/(.08 − .02)]/1.083 PVTerminal value = $863,689 64) Norris Co. has developed an improved version of its most popular product. To get this improvement to the market will cost $48 million but the project will return an additional $13.5 million for 5 years in net cash flows. The firm's debt-equity ratio is .25, the cost of equity is 13 percent, the pretax cost of debt is 9 percent, and the tax rate is 21 percent. All interest is tax deductible. What is the net present value of this proposed project? A) $906,411 B) $902,459 C) $879,838 D) $884,318 E) $889,760 - CORRECT ANS-C) $879,838 WACC = .11822 WACC = (1/1.25)(.13) + (.25/1.25)(.09)(1 − .21) NPV = −$48,000,000 + $13,500,000[(1 − 1/1.118225)/.11822] NPV = $879,838 65) Hu's has 25,000 shares of common stock outstanding with a beta of 1.4, a market price of $32 a share, and a dividend yield of 5.7 percent. Dividends increase by 4.2 percent annually. The firm also has $450,000 of debt outstanding that is selling at 102 percent of par that has a yield to maturity of 6.8 percent. The tax rate is 21 percent and all interest is tax deductible. The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of $328,000 and cash inflows of $52,500, $155,000, and $225,000 for Years 1 to 3, respectively. What is the NPV of the project? A) $28,515 B) $31,492 C) $36,511 D) $27,006 E) $30,157 - CORRECT ANS-E) $30,157 Common stock = 25,000($32) Common stock = $800,000 Debt = $450,000(1.02) Debt = $459,000 Total debt and equity = $800,000 + 459,000 Total debt and equity = $1,259,000 Rs = .057 + .042 Rs = .099, or 9.9% WACC = ($800,000/$1,259,000)(.099) + ($459,000/$1,259,000)(.068)(1 − .21) WACC = .0825, or 8.25% NPV = −$328,000 + $52,500/1.0825 + $155,000/1.08252 + $225,000/1.08253 NPV = $30,157 66) ABC is considering acquiring XYZ and has compiled this information on XYZ: Year 123 EBIT $ 318,000 $ 364,000 $ 392,000 Capital spending 46,500 28,000 36,200 Increases in net working capital 5,500 6,500 1,200 Depreciation 34,000 32,100 28,700 The applicable tax rate is 21 percent and the terminal value of XYZ as of Year 3 is $2.5 million. What is the NPV of this acquisition if the discount rate is 7.1 percent and the acquisition cost is $2.25 million? A) $538,316 B) $509,482 C) $499,003 D) $506,048 E) $496,399 - CORRECT ANS-E) $496,399 CF1 = $318,000(1 − .21) + 34,000 − 46,500 − 5,500 CF1= $233,220 CF2 = $364,000(1 − .21) + 32,100 − 28,000 − 6,500 CF2 = $285,160 CF3 = $392,000(1 − .21) + 28,700 − 36,200 − 1,200 CF3 = $300,980 NPV = −$2,250,000 + $233,220/1.071 + $285,160/1.0712 + ($300,980 + 2,500,000)/1.0713 NPV = $496,399 67) The Upper Tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45. The cost of floating equity is 9.5 percent and the flotation cost of debt is 6.6 percent. What should the firm use as their weighted average flotation cost? A) 8.01 percent B) 8.51 percent C) 8.33 percent D) 7.76 percent E) 8.60 percent - CORRECT ANS-E) 8.60 percent