QUIZ2 - Question 1 4 points Save To help finance a major...

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Unformatted text preview: Question 1 4 points Save To help finance a major expansion, Dimkoff Development Company sold a bond several years ago that now has 20 years to maturity. This bond has a 7% annual coupon, paid quarterly, and it now sells at a price of $1,103.58. The bond cannot be called and has a par value of $1,000. If Dimkoff's tax rate is 40%, what component cost of debt should be used in the WACC calculation? (Refer to Ch 10 as a review) 3.03% 3.28% 3.66% 3.85% 4.04% Question 2 4 points Save For a typical firm, which of the following is correct? All rates are after taxes, and assume the firm operates at its target capital structure. rd > re > rs > WACC. rs > re > rd > WACC. WACC > re > rs > rd. re > rs > WACC > rd. WACC > rd > rs > re. Question 3 4 points Save You were hired as a consultant to Keys Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 4.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 11.50%. The firm will not be issuing any new stock. What is the firm's WACC? (Ref to Ch 10 as a review) 7.55% 7.73% 7.94% 8.10% 8.32% Question 4 4 points Save Which of the following statements is CORRECT? If a company's tax rate increases but the YTM of its noncallable bonds remains the same, the after-tax cost of its debt will fall. All else equal, an increase in a company's stock price will increase its marginal cost of retained earnings, rs. All else equal, an increase in a company's stock price will increase its marginal cost of new common equity, re. Since the money is readily available, the after-tax cost of retained earnings is usually much lower than the after-tax cost of debt. When calculating the cost of preferred stock, a company needs to adjust for taxes, because preferred stock dividends are tax deductible. Question 5 4 points Save Which of the following is not a capital component when calculating the weighted average cost of capital (WACC)? Long-term debt. Common stock. Retained earnings. Accounts payable. Preferred stock. Question 6 5 points Save Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's payback? Year: 0 1 2 3 Cash flows:-$1,000$500$500$500 1.50 years 1.75 years 2.00 years 2.25 years 2.50 years Question 7 5 points Save For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT? The cost of equity is usually greater than or equal to the cost of debt. The WACC exceeds the cost of equity. The WACC is calculated on a before-tax basis. The interest rate used to calculate the WACC is the average cost of all the debt the company has outstanding and shown on its balance sheet. The cost of retained earnings typically exceeds the cost of new common stock. Question 8 5 points Save Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT? The project's IRR increases as the WACC declines. The project's NPV increases as the WACC declines. The project's MIRR is unaffected by changes in the WACC. The project's regular payback increases as the WACC declines. The project's discounted payback increases as the WACC declines. Question 9 5 points Save Cash flows are yearly as follows: A -400, 55, 55, 55, 225, 225 // B -600, 300, 300, 50, 50, 49 {Refer to problem 11-10, page 382 in your text.(11th Edition)} Utilizing the NPV approach, which project would you recommend? $30.16 Project "C" 10%, the highest rate! (duh!) Project "A" I don't have the text!. Question 10 5 points Save Cash flows for years "0" through "4" are as follows: A : -$10,000 , $6,500 , $3,000 , $3,000 , and $1,000; // for B: -$10,000, $3,500, $3,500 , $3,500 , $3500 {Refer to problem ST-2 page 380 in your textbook (11th Edition).} What is the simple payback for Project "X" and "Y", respectively? (assume cash flows are received evenly throughout any given year). 14.61% / 13.73% 13.73% / 14.61% 2.17 yrs / 2.86 years 2.85 yrs / 3.72 years 3.72 yrs / 2.84 yrs. Question 11 5 points Save Thomson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. (cash flows are: -$1,000, $500, $500, $500 in periods 0, 1, 2, 3 respectively). Use WACC is your discount rate. WACC = 10% Year: 0 1 2 3 Cash flows:-$1,000$500$500$500 $243.43 $221.30 $268.91 $272.46 $289.53 Question 12 5 points Save Blanchford Enterprises considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. Use the WACC as your discount rate. WACC = 10% Year: 0 1 2 3 4 Cash flows:-$1,000$475$475$475$475 $482.16 $496.38 $505.69 $519.05 $459.71 Question 13 5 points Save Which of the following statements is CORRECT? One defect of the IRR method is that it does not take account of cash flows over a project's full life. One defect of the IRR method is that it does not take account of the time value of money. One defect of the IRR method is that it does consider the time value of money. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until some time in the future. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. Question 14 5 points Save Tapley Dental Associates is considering a project that has the following cash flow data. What is the project's payback? Year: 0 1 2 3 4 5 Cash flows:-$1,000$300$310$320$330$340 2.11 years 2.50 years 2.71 years 3.05 years 3.21 years Question 15 5 points Save Edison Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC = 10% Year: 0 1 2 3 Cash flows:-$1,000$450$460$470 $142.37 $129.43 $166.51 $173.26 $189.94 Question 16 5 points Save NPV is a precise way to measure future performance due to its strict mathematical procedure. accurate way to calculate the value (or future value) of an asset. not subject to manipulation by financial modelers because of its computer usage and inputs. still a guess as you are using guess for future events. a number with a unit of "%". Question 17 5 points Save Which of the following statements is CORRECT? Projects with "normal" cash flows can have only one real IRR. Projects with "normal" cash flows can have two or more real IRRs. Projects with "normal" cash flows must have two changes in the sign of the cash flows, e.g., from negative to positive to negative. If there are more sign changes, then the cash flow stream is "nonnormal." The "multiple IRR problem" can arise if a project's cash flows are "normal." projects with "nonnormal" cash flows are almost never encountered in the real world. Question 18 5 points Save Given the following cash flows for "X" and "Y", which of the following is correct? X: -100, 10, 20, 30, 40, 50 Y: -100, 50, 40, 30, 20, 10 For all discount rates > 0%, NPV of "Y" is superior to "X". For a discount rate = 0%, both are identical projects therefore either can be selected. Payback is identical because all the cash flows are identical, even though they are in differing orders none of the above. "a" and "b" both are correct. Question 19 5 points Save Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. If Project A has a higher IRR than Project B, then Project A must have the lower NPV. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business. If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive. Question 20 5 points Save Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. The lower the WACC used to calculate it, the lower the calculated NPV will be. If a project's NPV is less than zero, then its IRR must be less than the WACC. If a project's NPV is greater than zero, then its IRR must be less than zero. The NPV of a relatively low risk project should be found using a relatively high WACC. Question 21 5 points Save Which of the following statements is CORRECT? If a project has "normal" cash flows, then its IRR must be positive. If a project has "normal" cash flows, then its MIRR must be positive. If a project has "normal" cash flows, then it will have exactly two real IRRs. The definition of "normal" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project's life. If a project has "normal" cash flows, then it can have only one real IRR, whereas a project with "nonnormal" cash flows might have more than one real IRR. ...
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This note was uploaded on 08/21/2009 for the course FIN 3332 taught by Professor L.fogelberg during the Fall '09 term at Troy.

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