Fin Man 2_1* midterm 12 [co Trueorfalse. 2. Tt 1 Thp-cakeven cash inflow is the minimum level of cash inflow necessary for « project to be ceptable pL Proje A 2% The is the compound annual rate of return that the firm will earn if it invests inthe project and receives the given cash inflows. (@) discount rate internal rate of return ty cost 6f capital A firm with a cost of capital of 13 percent is evalusting three capital projects. The internal rates of return are as follows: Taternal Rate Project of Return i 12% 2 3 3 The firm should (a) accept Project 2 and reject Projects | and 3. (b) accept Projects 2 and 3 and reject Project | (©) accept Project 1 and reject Projects 2 and 3. (@) accept Project 3 and reject Projects | and 2. A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as Project B 5 End-of- Year Initial End-of- Year ' Investment Cash Flows Investment Cash Flows $40,000 $20,000 $90,000 $40,000 : 20,000 40,000 20,000 80,000 29g ‘B28. ste fm in Table 9.1 has a required payback of two (2) yeas, they should (2) accept projects A and B. fre new financial analyst does not like the payback approach (Table 9.1) and determines that the firm’s required rate of retutn is 15 percent. His recommendation would be to. (a) accept projects A and B. (b) accept project A and reject B.(6) reject projeot A and accept B. underlying cause of conflicts in ranking for projects by internal rate of return and net ‘present value methods is () the reinvestment rate assumption regarding intermediate cash flows. + (b) that neither method explicitly considers the time value of money. (©) the assumption made by the IRR. method that intermediate cash flows are reinvested at the cost of capital (@) the assumption made by the NPV method that intermediate cash flows are reinvested at the internal rate of return 31. The tax treatment regarding the sale of existing assets that are sold for more than the book value but less than the original purchase price results in an ordinary tax benefit. a capital gain tax liability. recaptured depreciation taxed as ordinary income. a capital gain tax liability and recaptured depreciation taxed as ordinary income. “ax treatment regarding the sale of existing assets that are sold for their book value results in (a) an ordinary tax benefit. (b) no tax benefit or liability. (©) recaptured depreciation faxed as ordinary income, (4) a capital gain tax liability and recaptured depreciation taxed as ordinary income. 33. ‘The tax treatment regarding the sale of existing assets that are not depreciable or used in business and are sold for less than the book value results in (@) an ordinary tax benefit. © capital gain tax benefit. depreciation taxed as ordinary income. tax liability and recaptured depreciation taxed as ordinary income. Corporation is considering expanding operations to mect growing demand. With the capital ‘expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capitatis = (a) an increase of $120,000. {b) a decrease of $40,000. Corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by, $30,000, and Tong-term debt by $80,000. The change in net working capitals ie (a) an increase 6f $10,000. ‘an increase of $80,000. + Which of the following capital budgeting techniques ignores the time value of money? (@) Payback.(b) Net present value. (©) Internal rate-of return. the above. fh of the following statements is false? G) If the payback period is less than the maximum acceptable payback period, accept the project. + (b) If the payback period is greater than the maximum acceptable payback period, reject the project. (©) Ifthe payback period is less than the maximum acceptable payback period, reject the project (d) Two of thé above, of the following statements is false? § If the payback period is greater than the maximum acceptable payback period, accept the project. (b) If the payback period is less than the maximum acceptable payback period, reject the project. (©) I the proj Sivack period is greater than the maximum acceptable payback period, reject the (d) 760 of the above. hat 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? Should Tangshan Mining company sccept a new project if its maximum payback is 3.5 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 I, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year ” @) Yes. (b) No. io frm has common stock with a market price of $25 per share and an expected dividend of $2 ‘per share at the end of the coming year. The growth rate in dividends has been $ percent. The cost of the firm’s common stock equity is (a) 5 percent. (6) 8 percent pa ‘A firm has common stock with a market price of $55 per share and an expected dividend of $2.81 per share at the end of the coming year. The dividends paid on the outstanding stock over the past five years are as follows: Year Dividend $2.00 21429 245 2.62 ‘The cost of the firm's common stock equity is (@) 4.1 percent. + (b) Sil percent (©) 12:1 percent, the capital asset pricing model, the cost of common stock equity is the retum required by fesiors as compensation for (a) the specific risk of the firm. (b) the firm's diversifiable risk. (©) price volatility of the stock. fh's nondiversifiable sisk. DP 44.7%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 areas follows; Year Dividend 1 $4.00 2 428 3 4.58 4 4.90 5 5.24 The cost of this new issue of common stock is (a) 5.8 percent. \ {nce retained earnings are viewed as a fully subscribed issue of additional common stock, the cost of retained earnings is (a) less than the cast of new common stock equity (©) equal to the cost of new common stock equity. (©) greater than the cost of new common stock equity (@) not related to the cost of new common stock equity Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. ‘The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. Table 10.4 > 4 ces Project A Project B Initial Investment $350,000 $425,000 Year Cash Inflows (CF 1 ___ $140,000 $175,000 = 9105)C48. De. ~ 5 Ins z 765.000 150,000 2G 3 190,000 125,000 75) 4 100,000 oe 5 75,000 G2\ 6 30,000, TN “The NPVs of projects A and B are (See Table 10.4): (2) $95,066 and $56,386, respectively (b) $56,386 and $95,066, respectively. (6) $56,386 and -$95,066, respectively. (@) none of the above. ‘The Annualized NPV of project A is (See Table 10.4) @sx6n ©) 812,947. (© $38,227 (@) $21,828. ‘The Annualized NPV of project B is (See Table 10.4) (@) SIL673. @) $12,947. (©) $38,227. @ 821.828. Which project should be chosen on the basis of the normal NPV approach? (See Table 10.4) (@) Project A B) Project B () neither @ both Which project should be chosen using the Annualized NPV approach? (See Table 10.4) (a) Project A ©) Project B (©) neither (@) both