1

1. A company is considering an investment in a new project which would require $55,000 worth of (unrecoverable) capital expenditures and an increase of $45,000 in net working capital that will be recovered at the end of the project. Each year, starting at the end of the first year, the operating cash flows of the project will be $22,000 for 5 years. The project is so risky and so crazy its WACC is 16%. What is the net present value of the project?

   - $6.54

   $72.03

   $93.46

   - $27.97

   None of these

1 points

QUESTION 2

1. For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT?

   The interest rate used to calculate the WACC is the average after-tax cost of all the company s outstanding debt as shown on its balance sheet.

   The WACC is calculated on a before-tax basis.

   The WACC exceeds the cost of equity.

   The cost of equity is always equal to or greater than the cost of debt.

   None of the above.

1 points

QUESTION 3

1. Which of the following statements is CORRECT?

   When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.

   When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.

   Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.

   If a company s beta increases, this will increase the cost of equity used to calculate the WACC, but only if the company does not have enough retained earnings to take care of its equity financing and hence must issue new stock.

   None of the above.

1 points

QUESTION 4

1. Shushi Sushi is trying to decide whether or not to invest in a new line of business selling premade sushi in the refrigerated section at grocery stores and wants to calculate their WACC. Assume that their capital structure consists of 58% common stock, 12% preferred stock, and 30% debt. Further, analysts predict that their future cost of debt will be 6% and their cost of preferred stock is 11%. We also know that the current price of common stock is $25 and that the common stock is expected to pay a $2.40 dividend each year. The firm s tax rate is 35%. What is this firm s WACC?

   7.52%

   8.53%

   8.06%

   None of these

   8.69%

1 points

QUESTION 5

1. Suppose that Chipotle s stock paid a dividend of $1.40 last year and that the dividend is expected to remain constant in the future. Chipotle s beta is 0.55, the current risk-free rate is 2% and the market risk premium is 5%. What is the intrinsic value (current price) of Chipotle s stock?

   $29.47

   $38.36

   $28.00

   $2.55

   None of these.

1 points

QUESTION 6

1. Crozier Inc. is thinking about investing in a new project. The balance sheet reports that they currently have $32 million worth of long-term debt and $18 million worth of common equity. Their current cost of debt is 5%. According toYahoo.Finance.comthe current required return to Crozier s stock is 12%, the company has 1.5 million shares of stock outstanding and the stock currently trades for $34 per share. If their average tax rate is 34% and they have no preferred stock, what Crozier s weighted average cost of capital?

   6.43%

   9.30%

   7.52%

   8.65%

   None of these

1 points

QUESTION 7

1. During 2015, Sweet Things Bakery had revenue of $245,000. Costs were 40% of sales. Depreciation was $20,000. In addition, the bakery had an interest expense of $12,000 and an average tax rate of 25%. What is their operating cash flow?

   51.75

   None of these

   95.25

   115.25

   78.5

1 points

QUESTION 8

1. If you are given the following Income Statement and from the Balance Sheet you learned that the CAPX in 2014 was $26 and the NWC between 2014 and 2013 was $22, what is the free cash flow in 2014?

   Income Statement
   Sales	275
   Operating Costs	110
   Depreciation	40
   EBIT	125
   Interest (5%)	6.25
   EBT	118.75
   Taxes (40%)	47.5
   Net Income	71.25

   $75

   $23.25

   $67

   None of these

   $115

1 points

QUESTION 9

1. If a company earns $278,000 worth of taxable income what is the company's average tax rate?

   Taxable income	Tax rate
   First $50,000	15%
   $50,001 - $75,000	25%
   $75,001 - $100,000	34%
   $100,001 - $335,000	39%
   $335,001 - $10,000,000	34%
   $10,000,001 - $15,000,001	35%
   $15,000,001 - $18,333,333	38%
   Over $18,333,333	35%

   39%

   28%

   None of these

   32%

   34%