1

Titan Mining Corporation has 9 million shares of common stock outstanding and 340,000 6 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $38 per share and has a beta of 1.5, and the bonds have 20 years to maturity and sell for 119 percent of par. The market risk premium is 7.8 percent, T-bills are yielding 3 percent, and the companys tax rate is 36 percent.

a.	What is the firm's market value capital structure?(Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

	Weight
Debt
Equity

b.	If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Discount rate

%

2

The next dividend payment by ECY, Inc., will be $1.64 per share. The dividends are anticipated to maintain a growth rate of 8 percent, forever. The stock currently sells for $31 per share.

What is the dividend yield?(Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Dividend yield

%

What is the expected capital gains yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Capital gains yield

%

3

Central Systems, Inc. desires a weighted average cost of capital of 6 percent. The firm has an after-tax cost of debt of 4 percent and a cost of equity of 10 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

a) 1.83b) 2.17c) 1.90d) 2.10e) 2.00

4

The difference between the present value of an investments future cash flows and its initial cost is the: a) internal rate of return. b) profitability index. c) discounted payback period. d) payback period. e) net present value.

5

Which statement concerning the net present value (NPV) of an investment or a financing project is correct? a) An investment project should be accepted only if the NPV is equal to the initial cash flow. b) Any type of project should be accepted if the NPV is positive and rejected if it is negative. c) A financing project should be accepted if, and only if, the NPV is exactly equal to zero. d) An investment project that has positive cash flows for every time period after the initial investment should be accepted. e) Any type of project with greater total cash inflows than total cash outflows, should always be accepted.6

The primary reason that company projects with positive net present values are considered acceptable is that: a) the project's rate of return exceeds the rate of inflation. b) they return the initial cash outlay within three years or less. c) the investment's cost exceeds the present value of the cash inflows. d) they create value for the owners of the firm. e) the required cash inflows exceed the actual cash inflows.7 Accepting a positive net present value (NPV) project: a) is expected to increase the stockholders value by the amount of the NPV. b) guarantees all cash flow assumptions will be realized. c) means the present value of the expected cash flows is equal to the projects cost. d) indicates the project will pay back within the required period of time. e) ignores the inherent risks within the project.8 The net present value method of capital budgeting analysis does all of the followingexcept: a) incorporate risk into the analysis. b) use all of a project's cash flows. c) provide a specific anticipated rate of return. d) discount all future cash flows. e) consider all relevant cash flow information.9

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

a) $287.22

b) $1,195.12

c) $797.22

d) $204.36

e) $1,350.49

10

Flatte Restaurant is considering the purchase of a $9,300 souffl maker. The souffl maker has an economic life of four years and will be fully depreciated by the straight-line method. The machine will produce 1,650 souffls per year, with each costing $2.10 to make and priced at $4.90. Assume that the discount rate is 14 percent and the tax rate is 34 percent.

What is the NPV of the project?(Do not round intermediate calculations andround your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Should the company make the purchase?

No

Yes