Fall 2009 exam 3

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Unformatted text preview: FIN 221 Exam 3 Fall 2009 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 13.25% Year 0 1 2 3 4 Cash flows -$850 $300 $320 $340 $360 A. 12.90% B. 14.43% C. 17.31% D. 16.97% E. 17.65% 2. Mayspring Corporation common stock is currently selling for $72.00 per share. A call option on Mayspring Corporation that expires in 2 months has an exercise price of $69. This call option is said to be ____________. A. Out-of-the-money B. At-the-money C. covered D. In-the-money 3. As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow? Sales revenues, each year $40,500 Depreciation $10,000 Other operating costs $17,000 Interest expense $4,000 Tax rate 35.0% A. $15,959 B. $20,465 C. $18,024 D. $18,775 E. $14,457 4. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $875, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? A. 6.15% B. 5.95% C. 6.47% D. 5.31% E. 5.63% Use the following information to answer the next 2 questions. Willies Scottish Grease International is considering replacing their existing grease gouging equipment with new equipment that has a technology that will not only be less costly to operate but will gouge more grease. The original equipment was purchased 5 years ago at a cost of $280,000 and is being depreciated using 8-year straight-line depreciation to zero. The original equipment can be sold for $90,000 today. The new equipment cost is $600,000, qualifies for the 3-year MACRS depreciation class and has a 3-year useful life. The applicable MACRS rates are 33%, 45%, 15% and 7%, respectively. The new grease gouging equipment would increase revenues $50,000 annually and would decrease operating costs (other than depreciation) by $85,000 annually. At the end of the 3-year life of this replacement analysis, the old equipment has an estimated slavage value of zero and the new equipments salvage value is expected to be $100,000. The companys tax rate is 40% and their WACC is 14%. Also, the company expects to have enough other taxable income to write off any losses that may occur as a result of the replacement project. ...
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