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1. Question: 0' CO B) Mich of the following statements is most correct? Your 7 a. If a project with normal cash ﬂows has an lRR which exceeds the cost of
Answe" capital, then the project must have a positive NPV.
b. If the lRR of Project A exceeds the IRR of Project B, then Project A must also have
a higher NPV. c. The modiﬁed intemai rate of return (MIRR), which always provides the higher return
as compared to the intemai Rate of Return (IRR), should be used because of its
optimistic view on the project's return. . d. Answers b and c are correct.
e. None of the answers above is correct. instrustor The correct answer is a; the other statements are false. The IRR is the discount rate at which a
EXP'anat‘O”: project's NPV is zero. if a project's IRR exceeds the ﬁrm‘s cost of capital, then its NPV must be
positive, since the NPV is calculated using the ﬁrm's cost of capital to discount project cash ﬂows. Points 10 of 10
Received: 2. Question: (T CO B) A project has an upfront 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? Your Answer a. The project should be rejected since its return is less than the WACC. b. The project's internal rate of return is greater than 12 percent.
0. The project‘s modiﬁed'intemal rate of return is less than 12 percent
d. All of the above answers are correct. 6. None of the above answers is correct. instructor Statement b is correct; the other statements are incorrect. Statement 8 is incorrect; If the
EXP‘anat'W NPV>0, then the return must be >12%. Statement 0 is incorrect; if NPV>0, the MIRR>WACC. Points 10 of 10
Received: 3. Question: (T CO B) Assume a project has normal cash ﬂows. All else equal, which of the following
statements is correct? Your
Answer. The project's lRR increasess 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 increses as the WACC declines. Points 10 of 10
Received: 4. Question: (T CO C) Which of the following statements is correct? Y°ur "Characteristics line" is another name for the Security Market Line. 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 different industry. The slope of the characteristic line is the stock's standard deviation. The distance of the plot points from the characteristics line is a measure of the stock's
market risk. The distance of the plot points from the characteristics line is a measure of the stock‘s
discounted diversiﬁable risk. H Pagezoe Points 10 of 10
Received: 5. Question: (T CO D) A share of common stock hasjust paid a dividend of $2. if the expected longrun growth
rate for this stock is 5%, and if investors required rate of return is 10.5%, what is the stock price? Your Answer: $3539 $38.80 $37.23 $38.1 8 $39.14 Instructor ($2.10/(10.5%5%)) = $38.18
Explanation:
Points 10 of 10 Received: 6. Question: (TCO D) Albright Motors is expected to pay a yearend dividend of $3.00 a share (D1 = $3.00).
The stock currently sells for $30 a share. The required (and expected) rate of retum on the stock
is 16 percent. Question: lf the dividend is expected to grow at a constant rate, Q, what is 9?
Your K1 = D1IPO+g .16 = 33/3530 +9 9 = .06 = 6% Answer,
lnstrue’tor Formula
Explanahon: K1 = Dupe + g 16%: 3/30 + g
16% = 10% + g
6% = 9 Points 10 of 10
Received: 7. Question: (T CO E) You work for Smith Company as a consultant. Kroncke target capital structure is 30%
debt, 20% preferred, and 50% common equity. The aftertax cost of debt is 8%, the cost of
preferred is 6.5%, and the cost of retained earnings is 13.25%. the ﬁrm will not be issuing any
new stock. What is its WACC? Ange“; 10.07%
10.37%
9.48%
10.68%
10.325%
instructor Explanaﬁon: .3(8%) + .2(6.5%) + .5(13.25%) = % Points 10 of 10
Received: 8. Question: (T CO B, F) The Bingo Corporation is in the process of determining which of the following two
ro'ects that the ma invest in. The details are rovided below: I.“
Cost of Capital
Life of project
Annual cash flow
initial cost Salvage Value $250,000 $110,000 a. What is the payback period? b. Mat is the net present value of the two projects? 0. What is the internal rate of return of the two projects?
d. What is the proﬁtability index? e. Which of the two projects would you choose and which criteria would you use? Your Project A: initial cost 1 250000 annual cash flow for yr 119 350000 annual cash flow for yr 20 (350000+250000)
Answer: 600000 Project 8: initial cost —1 400000 annual cash ﬂow for yr 119 400000 annual cash ﬂow for yr 20
(400000+110000) 510000 a. Payback period for A: 3.57 years Payback period for B: 3.5 years b. Net present value
for A: $1390221,96 Net present value for B: $1599180.79 c. lRR for A: 27.83% lRR for B: 28.39% d. Proﬁtability
index for A: 2.11 Proﬁtability index for B: 2.14 e. i would chose Project 8 because it has a lower payback period and
higher lRR and PI than Project A. E instructor Project A Project B “p‘anat‘m initial investment 1 250,000 1 ,400000
annual cash ﬂow 350,000 400,000
350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 350,000 400,000 600,000 510,000 a. Payback Period 357142857“! 3.5
Present value of cash $2.640,221.96 $2,999,180.79
b. NPV 5139022196 $1,599,180.79
c.lnternal rate of return 27.83% 28.39%
0. Proﬁtability index 2112177568 2142271996 e. Since the projects are mutually exclusive 1 would choose project B.
Project B is also better in payback, lRR and in Proﬁtability index. Points 10 of 10
Received: 9. Question: (T CO B, F) Sorenson Stores is considering a project that has the following cash ﬂows: Year Cash Flows (end of period) Page 4 of 4 1 $2,000
2 $3,000
3 $3,000
4 $1,500
The project has a payback of 2.5 years, and the ﬁrm's cost of capital is 12%. What is the project‘s
NPV?
Your
Answer: $577 '68 $765.91 $1,049.80 $2,761.32 $3,765.91 lnstrug’tor Since we have a payback of 2.5 years we can determine the initial cost of the asset which is
Exp'anat‘o”? $6,500. The total present value of the cash ﬂows over 4 years at 12% is $7,265.91. When we
subtract the initial cost from the present value of the cash ﬂows we get a value of $765.91. Points 10 of 10
Received: 10. Question: (T CO B, F) Thompson Stores is considering a project that has the following cash ﬂow data. What
is the project‘s lRR? Note that a project's projected lRR can be less than the WACC (and even
negative), in which case it will be rejected. Year Cash Flow
0 ($1,000)
1 $300
2 $295
3 $290
4 $285
5 $270
Your
Answer 11.16%
12.40%
13.78%
15.16%
16.68%
E lrlwstmﬁctor The most effective method for this calculation is by the use of the IRR category in excel.
xp ana on: Points 10 of 10
Received: ...
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This note was uploaded on 12/11/2010 for the course FINANCE FI515 taught by Professor Fi during the Fall '09 term at Keller Graduate School of Management.
 Fall '09
 FI

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