after inflows for 14 years thereafter. If the an initial investment cost of $5 mill and promises $500,000 . If the annual cost of capital is 7%, the net present value of this investment is fimm is van a nvestment nerver in aller-tax cash intlows for 14. Psal thar ** there a) $627,266.01 b) $4,372,733.99 c) 9,372,733.99 d) - $627.266.01 s expected to provide after-tax operating cast n t is $15 mill. firm's weighted average cost of capital is 1170 operating cash inflows of $2 mill in year 1, $2.9 mill in your 5) What is the NPV of a project, if the initial per year, and the project is expected to provide 2. 53.3 mill. in year, and sl mill in year 49 a)-$5.8 mill b) $22 23 mill. c)-$7.77 mill d) $7.77 mill. 6) A firm is evaluating three mutually exclusive below. Given this information, which project(s) should the firm accept? Sive capital budgeting projects. The net present value of each project is Project 100.000 Project 2 10,000 Project 3 - 100.000 NPV, S a) accept Projects 1 and 2, and reject Project 3 b) accept Projects 1 and 3, and reject Project 2 c) accept Project 3, and reject Projects 1 and 2 d) accept Project 1, and reject Projects 2 and 3 7) What is the profitability index of a project that requires an initial investment of $50 mill. and promises cash inflows of $10 mill. per year for the next 10 years, if the annual cost of capital is 10 percent? Note, the firm is using the following formula: Profitability Index - (NPV/Initial Investment)*100 a) 22.89% b) 0.23% c) 100% d) 118.18% Illustration 2 A firm must choose from six independent capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent per year. 5 Project Initial investment, $ IRR, % NPV.$ 1 200,000 19 100.000 2 400,000 17 20.000 250,000 16 60,000 200,000 12 - 5,000 150,000 20 50,000 6 400,000 15 150,000 8) See illustration 2, if the firm is using the Profitability Index approach to ranking these projects, which project(s) should the firm accept? a) 1, 2, 3, 5, and 6 b) 1,2,3, and 5 c) 2, 3, 4, and 6 d) 1,3,5, and 6 $300,000 Jue of ial after-tax cost is $4,000,000 and his in year 1, $1,900,000 in yer year 2, 51.700.000 in year 3. and it is expected to provide **.700,000 in year 3, and $1.300.000 9) What is the r e in project if its initial after ex operating chatows , 000 in year TIITTI in year 47 e) 177 12.295 of capital of 16 percent is evaluating the f these projects are as follows: lehted average annual cost of capital of 16 ts. The internal rates of return of these projecte evaluating three mutually exclusive capital TO) Afwith a weighted avere Project 1 Project 2 15% IRR Project 3 139 The firm should a) accept all projects b) accept Project 2, and reject Projects 1 and 3 c) coept Project 3and reject Projects 1 and 2 d) reject all projects 11) Generally, for a corporation, the order of capital cost from the most expensive to the least expensive source a new common stock, retained camings, preferred stock, long-term debe b) common stock, preferred stock, long-term debt, short-term del c) preferred stock, new common stocks, common stock, retained earnings d) long-term debt, preferred stock, retained earnings, new common stock 12) Nico Trading Corporation is considering issuing long-term debt. The debt would have a 30-year maturity and a 10 percent annual coupon rate. In order to sell the issue, the firm's $1,000 par value bonds must be underpriced and sold at $950. In addition, the firm would have to pay flotation or issuance costs of 5 percent of the par value. The firm's corporate tax rate is 30 percent. Given this information, the after-tax cost of debt for Nico Trading would be a) 7.26% b) 11.17% c) 7.82% d) 7.39% 13) Tangshan Mining is considering issuing long-term debt. The debt would have 30 years to maturity and a 12 percent annual coupon rate, with coupon payments naid semi-annually. In order to sell the issue, the $1.000 par value bonds must be sold at a discount of 2 nement of the par value. In addition, the firm would have to pay flotation or issuance costs of 25 percent of the par value. The firm's corporate tax rate is 20 percent. Given this information, the after-tax cost of debt for Tangshan Mining would be a) 12.659 b) 6.32% c) 3.79% d) 5.06% $100 ar value per share. The stock will pay a 512 per share. Hence, the cost of the preferred stock 14) A firm has determined that it can issue preferred to annual dividend. The cost of issuing and selling the stoctis financing for the firm is a) 5.26 percent b) 12.63 percent c) 0.13 percent. d) 12 percent ck with a market price of $125 pers firm's dividendis has been steady Vidends $125 per shure. The firm recently paid ily paid a dividend of $4 per afeady at 5 percent per year. Hence, the cost of the firm's 151 A has common stock with sure. The growth rate of the firm's retained earnings is a) 8.20 percent b) 8.36 percent c) 0,08 percent d) 5.03 percent of return from investment in Spandex is 18.00 percent, an the North Dakota Pipeline (NDP) if the expected return on 0. calment in SP500 index is 18.00 percent, and NDP's beta is 0.9 16. What would be the cost of retained eaming Trury Bills is 3.00%, ne rate of return from a) 16.3% b) 67.2% c) 58.5% d) 21.9% 17 What would be the cost of a new common stock issi r the firm's latest dividend was $3 per share the stock price is currently $0.00 per common share dividends are expected to grow at 3 percent per year brear, and the new common stock llotation and undermicine costs total $5 per share? b) 6,64% c) 6.53% d) 6.33% 18) A firm has determined its cost of each source of capital and the optimal capital structure: Sources of capital After-tax cost, Target market proportions, % 40 12 Long-term debt Preferred stock Common stock 30 Afi. ratio Given this information, the weighted average cost of capital is a) 11.33 percent b) 34 percent c) 11.50 percent d) 15 percent and risk 19) Generally, when a firm borrows less, its rate of retum a) decreases increases b) decreases, decreases c) increases, increases d) increases; decreases 20) A firm has $300,000 in EBIT and a tax rate of 40 percent. 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D KEY EK E 22) Evaluation of capital budgeting projects (15 points) 1 CAB $ 3CA A construction company is looking to buy new pickup trucks. The company owner is considering two similar in size models: 2019 Chevy Silverado for $35,000 or 2019 Ford F150 for $28,000. Both models will be used for 10 years, then written off (will have $0 value). The Silverado averages 27 miles/gallon. The F150 averages 23 miles/gallon. The owner anticipates the monthly truck mileage to be around 3,000 miles. All other expenses, such as maintenance, emissions, etc. are expected to be the same for both models. If the firm's weighted average cost of capital is 12% Afro Truck loan payments will be made at the end of each month, and gas is expected to cost around $2.60 gallon, which truck should the owner purchase and why? Make sure to provide quantitative evidence to support your recommendation CAB CAB A Ba $ 2 PBC 28