Fin1set05spr09 - CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof Spencer Martin Problem Set 5 Firms and Wealth

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CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 5: Firms and Wealth Creation A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. Which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with production of a new car model? (Note: More than one answer is possible.) (a) The consequent reduction in the sales of the company’s existing models (b) The expenditure on new plant and equipment (c) The value of tools that can be transferred from the company’s existing plants (d) The cost of research and development undertaken on the model during the past three years (e) The salvage value of plant and equipment at the end of the project’s life (f) The annual depreciation charge (g) The reduction in the tax bill resulting from the depreciation charge (h) Interest Payments (i) Dividend Payments (j) A proportion of existing head office overhead expenses 2. A project has the following expected cash flow: C 0 C 1 C 2 C 3 (80) 30 20 10 The opportunity cost of capital is 13.4%. What is the NPV? (a) (17.10) (b) (27.14) (c) (31.13) (d) None of the above 3. A machine important to supporting operations lasts 3 years and has the following year by year costs : C 0 C 1 C 2 C 3 30,000 8,000 8,000 8,000 Think of C 0 as the acquisition cost and the others as operating and maintenance costs. If the cost of capital is 8%, what is the present value of the costs of operating a series of these machines in perpetuity? 1
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(a) $50,617 (b) $245,500 (c) $632,710 (d) None of the above, plus or minus $5,000 4. The Splurge Company is financed entirely by common stock. This has a beta of 1.4 and a total market value of $160 million. Suppose the firm repurchases $60 million of stock and replaces it with risk-free debt. What is the beta of the stock after the re-financing? Assume there are no taxes. (a) 0.88
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This note was uploaded on 01/20/2012 for the course FINANCE 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

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Fin1set05spr09 - CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof Spencer Martin Problem Set 5 Firms and Wealth

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