RIVESfinalexamPracticeQuestions

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1 Business Finance 620 Final Exam Practice Questions 53 Chapter 13 Review What is BMT’s WACC? BMT Products reports the following information: – 1.57 million shares of common stock outstanding with a price of \$26.50 – 69,000 shares of preferred stock outstanding with a price of \$38.45 and a \$2.72 annual dividend One issue of 18,400 BB-rated bonds outstanding \$1,000 face value, 6.65% coupon, 9-year maturity; 6.305% market YTM A second issue of 16,900 A-rated bonds outstanding \$1,000 face value, 7.15% coupon, 5-year maturity; 7.285% market YTM A third issue of 15,300 BBB-rated zero-coupon bonds outstanding \$1,000 face value, 13-year maturity; 7.415% market YTM – 0.88 equity beta – 30% combined federal-state marginal tax rate You also have the following market information: – The 3-month T-bill rate is 3.05%. – The market risk premium is 9.75%. – The annual rate of inflation is 2.20%. 54

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2 Chapter 8 Review You have the following information on a 7-year project: > The annual afte tax cash flow is \$550 000 The annual after-tax cash flow is \$550,000. > The initial investment cost is \$2.5 million. > The IRR is 12.1%. > The payback period is 4.55 years. At a 9.5% hurdle rate, what is the project’s NPV? A. (\$106,492) B. \$192,857 C. (\$207,163) D. \$222,287 55 Chapter 8 Review Which of the following statements is most likely true for as ix-year R&D project with an initial cost of \$9.3 million a six year R&D project with an initial cost of \$9.3 million and an annual after-tax cash flow of \$1.55 million, if the project’s hurdle rate equals the company’s WACC? A. The project’s IRR exceeds the company’s WACC. B. The project’s NPV equals zero. C. The project’s profitability index is negative. D. The project’s annual after-tax cash flow is sufficient to recover the initial investment at the project’s cost of capital. 56
3 Chapter 8 Review A four-year R&D project has an initial cost of \$475,000, after-tax cash flows at the end of each of the first three after tax cash flows at the end of each of the first three years of \$152,000, and an 11.5% cost of capital. What minimum after-tax cash flow would the project have to generate at the end of the fourth year to make the deal acceptable to management? A. \$165,012 B \$118 750 B. \$118,750 C. \$152,000 D. \$136,762 57 Chapter 8 Review You have the following project information: Which (if any) of these projects would be acceptable under a capital budget with a \$1.2 million limit? Project NPV IRR Initial Cost A \$ 67,000 12.7% \$ 500,000 B 59,000 10.5% 385,000 C (74,000) 13.6% 637,000 D 82,000 11.9% 463,000 A. Projects A and C only B. Projects B and D only C. Projects A, B and D only D. None of the projects would be acceptable. 58

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4 Chapter 8 Review A seven-year new-product project costs \$1.175 million to launch and generates annual after-tax cash flows of to launch and generates annual after tax cash flows of \$345,000. At a 12% cost of capital, by how much can after-tax cash flow decline without jeopardizing project profitability?
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