ABC Company has the following mutually exclusive projects. If the company's payback period is 2 years, which
Question:
ABC Company has the following mutually exclusive projects.
If the company's payback period is 2 years, which of these projects should be chosen?
Project A
Year
0 -19,500
1 11,500
2 8,750
3 2,500
Project B
Year
0 -$16,800
1 9500
2 7100
3 3500
Group of answer choices
Both Projects
Project B
Project A
Neither Projects
Question 2
ABC Company has the following mutually exclusive projects. If the company uses the NPV method to rank these two projects, which project should be chosen if the appropriate discount rate is 15 percent?
Project A
Year
0 -$19,520
1 11,500
2 8,750
3 2,500
Project B
Year
0 -$16,800
1 9,500
2 7100
3 3500
Group of answer choices
Project A
Project B
Question 3
ABC Company has the following mutually exclusive projects
Project A
Year
0 -$19,520
1 11,500
2 8750
3 2500
project B
Year
0 -$16,800
1 9500
2 7100
3 3500
If the company uses the Profitability Index to rank these two projects, which project should be chosen if the appropriate discount rate is 15 percent?
Group of answer choices
Both projects
Project B
Project A
Neither projects
Question 4
The following project has cash flows as follows:
Project A
Year
0 -$705,000
1 $225,000
2 $421,500
3 $275,000
What is the IRR? Round to one place past the decimal point and format as "XX.X"
Question 5
True/False: You must know the discount rate to compute the NPV of a project, but you compute the IRR without referring to the discount rate. Group of answer choices
True
False
Question 6
Pencil and Paper, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $1.37 million. The fixed asset will be depreciated straight-line to zero over its 3-year tax life, after which it will be worthless. The project is estimated to generate $1,255,000 in annual sales, with costs of $435,000. The tax rate is 21 percent and the required return is 10 percent. What is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Format as "XXX,XXX.XX"
Question 7
Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Year Project A
0 -$60,000
1 $38,000
2 $36,000
3 $29,000
The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent.
What is the NPV for Project A? Round to the nearest cent and format as "XX,XXX.XX"
Question 8
Capital Budgeting with Inflation. For questions 7 and 8 use the following information. Consider the following cash flows on two mutually exclusive projects: Project B
0-$75,000
1 $40,000
2 $42,000
3 $46,000
The cash flows of Project A are expressed in real terms, whereas those of Project B are expressed in nominal terms. The appropriate nominal discount rate is 12 percent and the inflation rate is 3 percent.
What is the NPV for Project B? Round to the nearest cent and format as "XX,XXX.XX"
Question 9
The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:
Group of answer choices
depreciable basis
depreciation tax shield
after-tax salvage value
after-tax depreciation savings
Question 10
Sunk costs include any cost that:
Group of answer choices
will be incurred if a project is accepted.
will occur if a project is accepted and once incurred, cannot be recouped.
has previously been incurred and cannot be changed.
will change if a project is undertaken.
Question 11
Seeing Red has a new project that will require fixed assets of $935,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company has a tax rate of 28 percent. What is the depreciation tax shield for Year 3? Round to the nearest cent and format answer as "XX,XXX.XX"
Question 12
Decision Trees. For questions 12 and 13, please use the following information: Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $28.6 million. If the DVDR fails, the present value of the payoff is $10.2 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.32 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 percent. Calculate the NPV of going directly to market. Format answer as "XX,XXX,XXX.XX"
Question 13
Decision Trees. For questions 12 and 13, please use the following information: Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $28.6 million. If the DVDR fails, the present value of the payoff is $10.2 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.42 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 11 percent. Calculate the NPV of test marketing before going to market. Format answer as "XX,XXX,XXX.XX"
Question 14
Financial break-even Analysis. You are considering investing in a company that sells steaks to local restaurants. Use the following information:
Sales price per steak = $43.80
Variable costs per steak = $10.85
Fixed costs per year = $466,000
Depreciation per year = $138,000
Tax rate = 23%
The discount rate for the company is 15 percent, the initial investment in equipment is $966,000, and the project's economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. What is the financial break-even level for this project in units?
Question 15
_____________ is the amount that each additional sale contributes to the profit of the whole project. Group of answer choices
Fixed cost
Variable cost
contribution margin
EAC
Question 16
Adjustments that a firm makes after a project is accepted are called _________.
Group of answer choices
pessimistic forecast
real options
Monte Carlo simulation
optimistic forecast
Question 17
ABC Corp. has a $4,000 par value bond outstanding with a coupon rate of 5.3 percent paid semiannually and 16 years to maturity. The yield to maturity of the bond is 3.6 percent. What is the dollar price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Format as "X.XXX.XX"
Question 18
Inflation and Nominal returns. The real rate is 3.7 percent and the inflation rate is 5.3 percent. What rate would you expect to see on a Treasury bill? Format as a percentage and round to one place past the decimal point as "X.X"
Question 19
Calculating Yield to Market. Flowerpot Corp. has a bond outstanding with a coupon rate of 5.5 percent and annual payments. The bond currently sells for $919.81, matures in 11 years, and has a par value of $1,000. What is the YTM of the bond? Format as a percentage and round to two places past the decimal point as "X.XX"
Question 20
Term Structure. _________ is the portion of a nominal interest rate or bond yield that represents compensation for the possibility of default
Group of answer choices
default risk premium
inflation premium
taxability premium
interest rate risk premium
Question 21
The next dividend payment by Skippy Jon Jon, Inc., will be $1.08 per share. The dividends are anticipated to maintain a growth rate of 4 percent, forever. The stock currently sells for $24 per share. What is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) Format as a percentage as "X.X
Question 22
Use the following information for Question 22 and 23. The newspaper reported last week that SunRise Enterprises earned $30.87 million this year. The report also stated that the firm's return on equity is 13 percent. The firm retains 85 percent of its earnings. What is the firm's earnings growth rate? Format as a percentage as "XX.XX"
Question 23
Use the following information for Question 22 and 23. The newspaper reported last week that SunRise Enterprises earned $34.19 million this year. The report also stated that the firm's return on equity is 13 percent. The firm retains 85 percent of its earnings. What will next year's earnings be? Round to the nearest dollar and format as "XX,XXX,XXX"
Question 24
Holiday World currently has an EPS of $2.15 and the benchmark PE for the company is 22. Earnings are expected to grow at 5 percent per year. What is your estimate of the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16). Please round to the nearest cent and format as "XX.XX"
Question 25True/ False. The PE ratio is negatively related to the stock's risk.
Group of answer choices
True
False
Corporate Finance
ISBN: 9781260772388
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe