Study guide for exam 2 - part 2 - Question(TCO B A project...

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Unformatted text preview: Question: (TCO B) A project has an up»iront cost of $100,000. The project‘s WACC is 12 percent and its net present value iss $10,000. Which of the following statements is most correct? s Your Answer: a. The project should be rejected since its retum is less than the WACC. b. The project‘s inmnal rate of return is grater than 12 parent. c. The project‘s modified internal rate of return in less than 12 percent d. All of the above answers are correct e. None of the above answers is correct. Instructor Explanation: Statement in is correct; the other statements are incorrect Statement a is incorrecc if the NPV>0. then the return must be >12%. Statement c is incorrect; it NFV>0, the MIRR>WACG Points Received: 0 of 10 a. Question: (TCO B) The regular payback method has a number of disadVanlages. some of which are listed below. Which of these items is not a disadvantage of this method? Your Answer: Lack of an objective. marker-determined benchmark for melting decisions Ignores cash flows beyond the payback iteriod. Does not directly account for the time value of money. Does not provide any indication regarding a project's liquidity. Does not directly account for differences in risk among projects. Points Received: 10 of 10 3. Question: (TCO E) Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end 0! Year 1. but you will receive a dividend of $9.25 at the end at Year 2. In addition, you expect to sell the stock for $150 at the and of Year 2. Question: If your expected rate of return is 16 percent how much should you be willing. to pay for this stock today? Your Answer: $118.35 instructor EsplanationL resent value of the cash flo~m_ Points Received: 10 of 10 4. Question: (TCO C) Which of the following statements is correct? Your Answer: The characteristics line is the regression line that results from plotting the returns on a particular stock versus the returns on a stock from a diffierent industry. The distance of the plot points from the characteristics line is a measure of the stock's discounted value risk “Characteristic line" It another name for the Security Market Line. "” ‘ The distance of the plot points from the characteristics line is a measure of the stock's market risk. The slope of the characteristic line is the stock’s standard deviation. Points Received: 0 of 10 5. Question: (TCO D) A share at common stock has just paid a dividend 0152. It the expected long-tun growth rate for this stockis 5% and it investors required rate of return is 10.5%, what is the stock price? Your Answer. $35.39 $38.80 $37.23 $38.18 $39. is Instructor Explanation: (32.10/(105%5%)) = 536.18 Points Received: 0 of lo a. Question: (1C0 D) Gary Wells Inc. plans to issue perpetual preferred sotck with an annual thvtdend at 56.50 per share. If the required remrn on theta preferred stock is 6.5%, at what price should die stock sell? Your Answer: $90.37 $92.69 $95.06 $97.50 $100.00 Instructor Explanation: $6.50/ 6.5% = 5100 Points Received: 10 of lo 7. Question: (1C0 E) You were hired as a consultant to Kronche Company, whose targetcapital structure is 4096 debt, 10% preferred. and 50% common equity. The alter-tax cost or debt is 5%. the cost of preferred is 7.5%, and the cost of retained earnings is 13.25%. the firm will not be issuing any new stock. Whatis its WAGE? Your Answer: 9.48% 9.78% 10.07% 10.37% 10.68% instructor Explanation: «6%) +.1(7.5':t) + 503.25%) = 9.78% Points Received: 0 of 10 6. Question: ('I‘CO B, F) The Bingo Commotion is in the process of determining which of the following two projects that they may invest in. The details are provided below: Project A 3 Cost of Cnplul ~ 12% 12% Life 0! protect ., t, 20 yam 20 year: Annull cash flow \ "W“ ‘ 3350.000 3400.000 Initial cast um”... 4 Wm”... . $1,250,000 91,400.000 Salvage Value $250,000 $110,000 a. What in the payback period? b. What is the net pteaent value at the two projects? c. Whitll the Intern-1 me otremtn of the two projects? d. What is the profitability index? e. Which of the two projects wanld you choose and which criteria would you use? Yun- Answer: Instructor Explanation: __ . anck Period Mull value of gash Polnts Received: 0 of 10 9. Question: (T00 13, F) Sotensan Stores ls considering a Meet tint has the following cash flown; Yen Cult Flows (end of period) 1 1 52,009 ‘ ‘ ‘ 2 53,000 ' ‘ 3 $3,000 . 4 $1,500 The project has I paybuck at 2.5 years, and the film‘s cost of capital is 12%, What is the project's NW? l Your Answer: ‘ $577.68 ' , $735.91 . " 31,049.80 _ ,, t * ’ » $2,761.32 ' ' * ' $3,765.91 Instructor Explanation: Since we have a payback of 2.5 years we can determine the initial cost of the asset which is $6,500. The tau! present value of the ash flows even: years at 12% is $7,265.91. When we :ubmctthe initial cost born the present value of the cash flows we get a value ofs765.91_ Points Received: 10 of 10 10. Question: , (TCD B, F) Thompson States is considering a project that has the following cash flow data. Whats the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case ilwili be rejected. Year Cash Flow ($1,000) $300 $295 $290 , 5285 S270 thl‘JI—‘O Your Answer: 11.16% 12AM 13.78% 15.16% 16.68% Instructor Explanation: The most effective method for this calculations by the use of the IRR ca mgory in exceL Points Received: 10 of 10 ...
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