Question 1 0 /5 points The cost of preferred stock is computed the same as the: * @ pretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity. cost of an irregular growth common stock. Question 2 0 /5 points Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent? 9.89 percent x 10.43 percent 11.02 percent 11.38 percent 12.17 percent Hide question 2 feedback WACC = . 461.158) + .05(.083) + .49(.068) WACC = .1102, or 11.02% Question 3 0 /5 points The capital structure weights used in computing a company's weighted average cost of capital: * are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock. Question 4 5 /5 points Hydro Systems has bonds outstanding with a face value of $1,000, 13 years to maturity, and a coupon rate of 6.5 percent, paid annually. What is the company's pretax cost of debt if the bonds currently sell for $1,056? VO 5.87 percent 6.42 percent 4.71 percent 5.36 percent 5.55 percent Hide question 4 feedback $1,056 = .065($1,000*[1 - [1/(1 + /)131)/r) + $1.000/(1 + 13 Using trial-and-error, a financial calculator, or a computer. r= 5.87% or BAII: PV= -$1,056; N=13; PMT=.065*($1,000)=65; FV=1,000 => CPT I/Y= 5.87% or TI 83/84: PV= -$1,056; N=13; PMT=.065 ($1,000)=65: FV=1.000; => Alpha Enter I/Y= 5.87% Question 5 5 /5 points Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity? 9.41 percent 951 percent 8.47 percent VO 8.27 percent 8.82 percent Hide question 5 feedback RE= [$2.18(1.022)]/$36.72 + .022 R-= .0827, or 8.27%Question 6 0 / 5 points Steve has invested in twelve different stocks that have a combined value today of $121,300. Fifteen percent of that total is invested in Wise Man Foods. The 15 percent is a measure of which one of the following? x Portfolio return Portfolio weight O Degree of risk Price-earnings ratio Index value Question 7 0 /5 points Unsystematic risk: can be effectively eliminated by portfolio diversification. is compensated for by the risk premium. is measured by beta. * O is measured by standard deviation. is related to the overall economy. Question 8 0 /5 points If the economy is normal. Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock? -100346 " -008464 -007420 * 0.073927 -094315 Hide question 8 feedback E(Ad = .80(.143) + .20(-.087) E(A = .097, or 9.7% 0? =.80(.143 - .097) + .20(-.087 - _097)2 2 =.008464 Question 9 0 / 5 points Standard deviation measures which type of risk? Total Non-diversifiable * O Unsystematic Systematic Economic Question 10 0/5 points What is the expected return on a portfolio that is equally weighted between Stocks M and N given the following information? State of Probability of Rate of Return Economy State of Economy if State Occurs Stock M Stock N Boom -13 .18 - .14 Normal 82 06 .06 Recession.05 14 18 5.28 percent 5.87 percent * 600 percent 6.32 percent 5.40 percent Hide question 10 feedback E(/d = . 13[(.18 -.14)/2] + .82[(06 + .06)/2] + .05[(-.14 + .18)/2] E(/)= .0528, or 5.28% Question 11 5 /5 points The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent? $194,736.05project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent? $194,736.05 $201,033.33 $192,536.05 $188,569.91 $193,132.81 Hide question 11 feedback NPV = -$34,500 - 2.200 + $49,500([1 - (1/1.156)]/.156) + $2.200/1.1569 NPV = $193,132.81 BAII : CFO=-$36,500 - 2.200; CO1= $49,500; FO1=8; C02= $49.500+$2,200: F02=1: N=15.6 => CPT NPV= $193,132.81 TI 83/84: npv(15.6, (-$36,500 - 2.200), [$49,500, ($49,500+$2,200)). (8,1]) enter NPV= $193,132.81 Question 12 0 / 5 points Phone Home, Inc. is considering a new five-year expansion project that requires an initial fixed asset investment of $6.089 million. The fixed asset will be depreciated straight-line to zero over the project's life. after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $4,389,000 in annual sales, with costs of $1,731.200. The tax rate is 24 percent. What is the annual operating cash flow for this project? $1,727.570 $1,211.407 $2.312.200 * $936,000 $2.848.315 Hide question 12 feedback OCF = ($4,389,000 - 1,731.200)(1 - .24) + ($6,089,000/5](.24) OCF = $2,312,200 Question 13 0 / 5 points A company that utilizes the MACRS system of depreciation but does not use bonus depreciation: will have equal depreciation costs each year of an asset's life. will have a greater depreciation tax shield in Year 2 than in Year 1. can depreciate the cost of land. will expense less than the entire cost of an asset. will fully depreciate a MACRS five-year asset within 5 years. Question 14 0 /5 points Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2. .32. and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2? *$216,000/(1 + .2 + .32) $216,000(1 - .2 -.32) $216,0001.20 + .32) ($216,000(1 - .20)](1 - .32) $216,000[(1 + .20)(1 + .32)] Question 15 0 / 5 points GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? * Opportunity Fixed Incremental Erosion Sunk Question 16 5 / 5 points When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: accepted because the payback period is less than the required time period. accepted because the profitability index is greater than 1. accepted because the profitability index is negative. rejected because the internal rate of return is negative. rejected because the net present value is positive. Question 17 5 /5 points You estimate that a project will cost $33,700 and will provide cash inflows of $14,800 in Year 1 andis 14.2 percent? Why or why not? Yes; The Plis .87. Yes; The Pl is .93. Yes; The PI is 1.06. No: The Pl is 1.06. No; The Pl is .87. Hide question 17 feedback PV Inflows = $14.800/1.142 + $24,600/1.1423 PV Inflows = $29.476.93 BAII: CFO=0; CO1=$14,800; F01=1; C02=$24,600; F02=1; 1=14.2 =>CPT NPV= $29,476.93 TI 83/84: npv(14.2, 0. [$14,800,$24,600]) enter npv=$29.476.93 PI = $29.476.93/$33,700 PI = .87 The Pl is less than 1 so the project should be rejected. Question 18 0 / 5 points The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR? 12.62 percent 13.41 percent 14.48 percent 13.22 percent * ) 14.56 percent Hide question 18 feedback NPV = 0 = -$107,400 + $37,200/(1 + IRR) + $54,600/(1 + IRR)2 + $46,900/(1 + IRR)3 IRR = .1341, or 13.41%% BAII: CFO=-$107,400, C01= $37,200, F01=1; C02=$54,600; F02=1; CO3=$46,900; F03=1; CPT IRR= 13.41% TI 83/84: irr(0. -$107,400, [$37,200,$54,600, $46,900]) enter irr=13.41% Question 19 0 / 5 points It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period? 1.82 years 2.67 years * 2.82 years 1.67 years 1.79 years Hide question 19 feedback Payback period = $9,600/$3,600 Payback period = 2.67 years Question 20 0 / 5 points A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value? -$11,748.69 O-$10,933.52 -$11,208.62 *-$10,457.09 -$12,006.13 Hide question 20 feedback NPV = -$42.100+ $16,500/1.126 + $11,700/1.1262 + $10,400/1.1264 NPV = -$11,748.69 BAIL: CFO=-$42.100; C01=$16,500; FO=1: C02=$11.700; F02=1; C03=$10,400; F03=1; 1=12.6=> CPT NPV=- $11,748.69 TI 83/84 nov(12.6, -$42,100, ($16,500, $11,700, $10,400]] enter nov=-$11,748.69