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2.
Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC?
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The market risk premium declines. |
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The flotation costs associated with issuing new common stock increase. |
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The company’s beta increases. |
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Expected inflation increases. |
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The flotation costs associated with issuing preferred stock increase |
3.
Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects?
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Project A, which has average risk and an IRR = 9%. |
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Project B, which has below-average risk and an IRR = 8.5%. |
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Project C, which has above-average risk and an IRR = 11%. |
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Without information about the projects’ NPVs we cannot determine which project(s) should be accepted. |
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All of these projects should be accepted. |
4.
Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
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The new project is expected to reduce sales of one of the company’s existing products by 5%. |
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Since the firm’s director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project’s initial cost. |
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The company has spent and expensed $1 million on R&D associated with the new project. |
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The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project. |
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The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year. |
5.
Stock A’s beta is 1.5 and Stock B’s beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.
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Stock A would be a more desirable addition to a portfolio then Stock B. |
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In equilibrium, the expected return on Stock B will be greater than that on Stock A. |
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When held in isolation, Stock A has more risk than Stock B. |
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Stock B would be a more desirable addition to a portfolio than A. |
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In equilibrium, the expected return on Stock A will be greater than that on B. |
6.
An investment pays $2,200 per year for the first 7 years, $4,400 per year for the next 6 years, and $6,600 per year the following 7 years (all payments are at the end of each year). If the discount rate is 9.90% compounding quarterly, what is the fair price of this investment? Work with 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.
7.
On January 1, 2013, your brother’s business obtained a 30-year amortized mortgage loan for $350,000 at a nominal annual rate of 7.35%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2017? Calculate using at least 4 decimal points and round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72 in the answer box provided.
8.
The XYZ Company paid $1.85 dividend yesterday. Its dividend growth rate is expected to be constant at 22.30% for 2 years, after which dividends are expected to grow at a rate of 5.80% forever. Its required return (rs) is 13.05%. What is the best estimate of the current stock price? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
9.
Show stock price calculation for #8 here
10.
A 7-year, 11.00% semiannual coupon bond with a par value of $1000 may be called in 5 years at a call price of $1,149.00. The bond sells for $985.50. (Assume that the bond has just been issued.). What is it’s yield to maturity? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
11.
Assume that you are considering the purchase of a 14-year, noncallable bond with an annual coupon rate of 9.60%. The bond has a face value of $1000, and it makes semiannual interest payments. If you require an 11.50% yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
Question 12
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0 multiple_choice_question 67768486
Mr. Jones has a 2-stock portfolio with a total value of $510,000. $195,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 18.70%, Stock B is 10.65%, and correlation between Stock A and Stock B is –0.70, what would be the expected risk on Mr. Jones’ portfolio (standard deviation of the portfolio return)? Calcualte with at least 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
Question 13
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0 essay_question 67769684
Show portfolio risk calculation for # 11 here.
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Question 14
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0 multiple_choice_question 67768498
Mrs. Landis has a 2-stock portfolio with a total value of $520,000. $185,000 is invested in Stock A with a beta of 1.25 and the remainder is invested in Stock B with a beta of 1.25. What is her portfolio’s beta? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
Question 15
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0 multiple_choice_question 67768537
You were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 10% preferred, and 58% common equity. The interest rate on new debt is 8.40%, the yield on the preferred is 5.85%, the cost of common from retained earnings is 13.20%, and the tax rate is 33.00%. The firm will not be issuing any new common stock. What is XYZ’s WACC? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
Question 16
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0 multiple_choice_question 67768542
ABC Trucking’s balance sheet shows a total of noncallable $33 million long-term debt with a coupon rate of 6.80% and a yield to maturity of 6.80%. This debt currently has a market value of $55 million. The balance sheet also shows that the company has 13 million shares of common stock, and the book value of the common equity is $255.80 million. The current stock price is $21.60 per share; stockholders’ required return, rs, is 16.25%; and the firm’s tax rate is 33.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value? Work with at least 4 decimals and round your final answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
Question 17
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0 essay_question 67769678
Show the WACC difference calculation for # 14 here.
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Question 18
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0 multiple_choice_question 67768588
Barry Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? WACC = 9.35%
| Year |
0 |
1 |
2 |
3 |
4 |
5 |
| CFs |
-$43,500 |
8,750 |
17,500 |
26,250 |
35,000 |
43,750 |
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Question 19
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0 multiple_choice_question 67768599
Find internal rate of return of a project with an initial cost of $43,000, expected net cash inflows of $9,550 per year for 8 years, and a cost of capital of 8.80%. Round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.
Question 20
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0 multiple_choice_question 67768626
Expected Return, Variance, Std. Deviation and Cofficient of Variation: Magee Inc.’s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm’s returns will have the probability distribution shown below. What’s the standard deviation of the estimated returns? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.
| State of the Economy |
Probability of State Occurring |
Stock’s Expected Return |
| Boom |
30% |
22.20% |
| Normal |
45% |
13.35% |
| Recession |
25% |
–11.70% |
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|
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10.35% |
Question 21
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0 essay_question 67769670
Show standard deviation of the estimated returns calculation for # 17 here.
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Question 22
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0 multiple_choice_question 67768642
Cash Flow Estimation Salvage Value: XYZ Corporation is considering an expansion project. To date they have spent $56,500 investigating the viability of the project and have decided to proceed. The CEO of XYZ spent $17,600 last year on his business trip to New York where he discussed about the proposed new project with the board members. The company spent $52,500 on a marketing study before its current analysis regarding whether to accept or reject the project. The proposed project will cost $985,000.00. The project will be depreciated over a 3 year MACRS class life. XYX would use the 3-year MACRS method to depreciate the machine and equipment which are 33.33%, 44.45%, 14.81%, and 7.41%. If the project is undertaken the company will need to increase its inventories by $37,600, and its accounts payable will rise by $6,700. The company will realize an additional $865,450.00 in sales over each of the next three years. The company’s operating costs (not including depreciation) will increase by $374,577.00 a year. Both sales and the operating cost are expected to grow 5.20% annually during the life of the project. The company’s tax rate is 35.00%. At t = 3, the project’s economic life is complete, but it will have a salvage value (before-tax) of $91,500.00 after three years. The project’s WACC is 9.25%. What is the project’s net present value (NPV)? Work with at least 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.667 round as 345.67 and if your answer is .05718 or 5.718% round as 5.72.
Question 23
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0 essay_question 67769673
XYZ Corporation is considering an expansion project. To date they have spent………………..
Find the question above (# 18) and show your work for the expansion project in details here. You may work in Excel and Paste your work here. However, format Excel worksheet (check my format excel file video) before pasting your work here. Answer the following questions:
a. What is the Year 0 net cash flow? (.5 pt) b. What are the net operating cash flows in Years 1, 2, and 3? (4.5 pts) c. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital – also called terminal value)? (2 pt) d. What is the NPV of the project? (2 pts)
e. Should the machine be purchased? Why?. (1 pt) |
