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Business Finance 620 Practice Final Exam
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1.
Your firm has a portrait of the company founder that originally cost $250, has an undepreciated
book value of zero, and is worth an estimated $175,000 because the artist is famous.
Last week,
the Ann Arbor Museum of Art offered your firm $150,000 for the portrait.
Ignoring taxes, what
opportunity cost should be used for this work of art in capital budgeting decisions?
A. $25,000
B. $175,000
C. $150,000
D. Zero
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2.
At current prices and a 13.7% hurdle rate, a seven-year R&D project's NPV is $187,460.
By what
minimum amount must the initial cost of the project change before management can justify waiting
three years to invest?
Assume the project’s annual after-tax cash flows will remain unchanged in
the future, and the firm’s marginal income tax rate is 35%.
A. The initial cost must increase by $81,685.
B. The initial cost must decrease by $77,046.
C. The initial cost must decrease by $88,083.
D. The initial cost must decrease by $59,926.
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3.
A five-year investment project has fixed costs of $800, depreciation expense of $900, a 60%
variable cost ratio, a 35% marginal tax rate, and a 15% cost of capital.
Project assets are
depreciated straight line over the life of the project to a zero tax basis.
What is the project’s
economic break-even revenue?
A. $3,960
B. $4,380
C. $5,952
D. $4,250
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4.
All the following statements concerning the cost of capital are correct EXCEPT:
A. Two firms with the same capital structure may not have the same WACC.
B. To reflect the true after-tax cost of capital for the firm, the WACC must include an
adjustment for the tax savings associated with interest payments.
C. If the NPV calculated at a firm’s WACC is zero for every project the firm
operates,
common shareholders will not earn their required return.
D. Two firms with the same cost of debt may have different costs of common equity.
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5.
An investment project will give a firm a one-time after-tax profit of $247,500 today.
How much
should management be willing to pay for this project?
Assume the firm's marginal tax bracket is
35%, and its WACC is 12.85%.
A. $416,000
B. $247,500
C. $447,000
D. The answer cannot be determined from the information provided.