10. Now suppose that you are told that the lens-tinting equipment would bring LNZ after-tax cost
savings of $5,000 per year for five years. If all other details are as given in the original question
data, how would these cost savings affect the NAL for LNZ?
A) The NAL would decrease by $25,000.
B) The NAL would decrease by $21,062.
C) The NAL would increase by $25,000.
D) The NAL would increase by $21,062.
E) The NAL would not be affected

 

17. Monkey Inc. is debating whether to convert its all-equity capital structure to one that is 40%
debt. There are currently 300,000 shares outstanding and the price per share is $40. EBIT is
expected to remain at $650,000 per year forever. The interest rate on new debt is 6% and it is
a perfect capital market. Andi, a shareholder of the firm, has 3,000 shares. Suppose the firm
converts but she prefers the current all-equity capital structure. What strategy would she use to
achieve her desired cash flows?
A) Sell 1,200 shares of the firm and invest the proceeds of $36,000 at 6% interest.
B) Sell 1,200 shares of the firm and invest the proceeds of $48,000 at 6% interest.
C) Sell 1,800 shares of the firm and invest the proceeds of $36,000 at 6% interest.
D) Sell 1,800 shares of the firm and invest the proceeds of $48,000 at 6% interest.
E) None of the above

 

27. Your firm's management is deciding whether to use its accumulated cash to either expand the
firm's operations, which will have an NPV of $1 million, or to pay out the cash in a share
repurchase. If perfect capital markets hold, which option would be preferred by shareholders?
A) Shareholders would prefer the repurchase since the share price will be higher.
B) Shareholders would prefer the expansion since the share price will be higher.
C) Shareholders would be indifferent between the two options.
D) There is not enough information to answer the question.
E) None of the above