Finance 1. The yield to maturity on a bond: A is fixed in the indenture. B is lower for higher risk bonds. C is the required rate of return on the bond. D is generally below the coupon interest rate. 2. Shafer Corporation issued callable bonds. The bonds are most likely to be called if: A Interest rates decrease B Interest rates increase C Shafer Corporation needs additional financing D Shafer Corporation?s stock price increases dramatically 3. The Net Present Value method: A) is consistent with the goal of shareholder wealth maximization B) recognizes the time value of money C) uses all of a project?s cash flows except for its financing cash flows D) all of the above 4. Easy Appliances Inc. is considering a new inventory system that will cost $100,000. The system is expected to generate positive cash flows over the next four years in the amounts of $25,000 in year one, $35,000 in year two, $45,000 in year three, and $30,000 in year four. Easy Appliances required rate of return is 8%. What is the net present value the nearest $10? A $89,070 B $21,870 C $10,930 D $ 9,890 5. Easy Appliances Inc. is considering a new inventory system that will cost $100,000. The system is expected to generate positive cash flows over the next four years in the amounts of $25,000 in year one, $35,000 in year two, $45,000 in year three, and $30,000 in year four. Easy Appliances required rate of return is 8%. What is the internal rate of return for the project? A 8.91% B 10.93% C 11.78% D 12.60% 6. Zelluose Corp. is considering two mutually exclusive projects, A and B. Project A cost $50,000 and is expected to generate $38,000 in year one and $30,000 in year two. Project B costs $70,000 and is expected to generate $24,000 in year one $32,000 in year two, $23,000 in year three, and $29,000 in year four. Zelluose Corp. has required rate of return for these projects is 12%. The profitability index for Project A is: A 1.100 B 1.435 C 1.973 D 1.157 7. Barrett battery Recyclers is considering a project with the following cash flows Initial Outlay = $100,000 Cash Flows Year 1 = $40,000 Year 2 = $50,000 Year 3 = $60,000 If the appropriate discount rate is 15%, compute the NPV of this project. A - $13,247 B $12,041 C $37,821 D $49,521 8. The calculation of incremental free cash flows over project?s life should include: A) labor and materials savings. B) additional revenue. C) interest to bondholders. D) A and B 9. Sunk costs are: A) recoverable. B) incremental. C) not relevant in capital budgeting. D) not deductible for tax purposes. 10. You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. Since you are not an expert on industrial vehicles, you hire a consulting firm to make recommendations. The consultants charge you $1,500 and recommend the purchase of the model CP8 truck. The truck?s base price is $40,000 and it will cost another $10,000 to modify it for special use by your firm. The company expects to sell this new truck in three years for $20,000 (salvage value). Use of the truck will require an increase in the company?s net working capital of $2,000. Use of the truck is expected to increase the firm?s EBIT by $25,000. The firm?s marginal tax rate is 40%. What is the initial outlay required to fund this project? A) $50,000 B) $51,500 C) $52,000 D) $53,500 11. What is the annual after-tax cash flows for the new truck project? A) $25,000 B) $ 5,100 C) $31,600 D) $21,600 12. What is the terminal cash flow for the new truck project? A) $23,600 B) $27,000 C) $25,000 D) $21,600 13. Eastlick Dairy invests in a new kind of frozen dessert called polar cream that becomes very popular. So many new customers come to the new store that the sales of existing ice cream products are also increased. The extra sales revenue: A) should not be counted as incremental revenue for the project because the sales come from existing products. B) are synergistic effects that should be counted as incremental revenue for the project. C) are cannibalized sales that should be excluded from the analysis. D) should be included in the analysis, but the cost of the ice cream sold should not since that is a recurring expense. 14. Cost of Capital is: A) the coupon rate of debt. B) a hurdle rate set by the board of directors each year. C) the rate of return that must be earned on investments if the firm value is to remain unchanged. D) the average cost in dollars of the firm?s assets. 15. Two considerations that cause a corporation?s cost of capital to be different than its investor?s required rate of return. A) corporate taxes and floatation costs. B) individual taxes and corporate taxes. C) individual taxes and dividends. D) corporate taxes and the earned income credit tax. 16. Jones Company has a target capital structure of 40% debt 10% preferred stock and 50% common equity. The company cost of debt is 8%, its cost of preferred stock is 10%, and its cost of new common stock is 14%. The company?s marginal tax rate is 35%. The company decided that the company had the funding needed internally and would not have to issue new common stock. What is the company?s WACC ? A) 10.08% B) 6.72% C) 16.8% D) 8.00%

Homework Name _______________ 1. The yield to maturity on a bond: A B C D 2. Shafer Corporation issued callable bonds. The bonds are most likely to be called if: A B C D 3. Interest rates decrease Interest rates increase Shafer Corporation needs additional financing Shafer Corporation's stock price increases dramatically The Net Present Value method: A) B) C) D) 4. is fixed in the indenture. is lower for higher risk bonds. is the required rate of return on the bond. is generally below the coupon interest rate. is consistent with the goal of shareholder wealth maximization recognizes the time value of money uses all of a project's cash flows except for its financing cash flows all of the above Easy Appliances Inc. is considering a new inventory system that will cost $100,000. The system is expected to generate positive cash flows over the next four years in the amounts of $25,000 in year one, $35,000 in year two, $45,000 in year three, and $30,000 in year four. Easy Appliances required rate of return is 8%. What is the net present value the nearest $10? A $89,070 5. C $10,930 D $ 9,890 Easy Appliances Inc. is considering a new inventory system that will cost $100,000. The system is expected to generate positive cash flows over the next four years in the amounts of $25,000 in year one, $35,000 in year two, $45,000 in year three, and $30,000 in year four. Easy Appliances required rate of return is 8%. What is the internal rate of return for the project? A 8.91% 6. B $21,870 B 10.93% C 11.78% D 12.60% Zelluose Corp. is considering two mutually exclusive projects, A and B. Project A cost $50,000 and is expected to generate $38,000 in year one and $30,000 in year two. Project B costs $70,000 and is expected to generate $24,000 in year one $32,000 in year two, $23,000 in year three, and $29,000 in year four. Zelluose Corp. has required rate of return for these projects is 12%. The profitability index for Project A is: A 1.100 B 1.435 C 1.973 D 1.157 7. Barrett battery Recyclers is considering a project with the following cash flows Initial Outlay = $100,000 Cash Flows Year 1 = $40,000 Year 2 = $50,000 Year 3 = $60,000 If the appropriate discount rate is 15%, compute the NPV of this project. A 8. $37,821 D $49,521 recoverable. incremental. not relevant in capital budgeting. not deductible for tax purposes. You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. Since you are not an expert on industrial vehicles, you hire a consulting firm to make recommendations. The consultants charge you $1,500 and recommend the purchase of the model CP8 truck. The truck's base price is $40,000 and it will cost another $10,000 to modify it for special use by your firm. The company expects to sell this new truck in three years for $20,000 (salvage value). Use of the truck will require an increase in the company's net working capital of $2,000. Use of the truck is expected to increase the firm's EBIT by $25,000. The firm's marginal tax rate is 40%. What is the initial outlay required to fund this project? B) $51,500 C) $52,000 D) $53,500 What is the annual after-tax cash flows for the new truck project? A) $25,000 12. C labor and materials savings. additional revenue. interest to bondholders. A and B A) $50,000 11. $12,041 Sunk costs are: A) B) C) D) 10. B The calculation of incremental free cash flows over project's life should include: A) B) C) D) 9. - $13,247 B) $ 5,100 C) $31,600 D) $21,600 What is the terminal cash flow for the new truck project? A) $23,600 B) $27,000 C) $25,000 D) $21,600 13. Eastlick Dairy invests in a new kind of frozen dessert called polar cream that becomes very popular. So many new customers come to the new store that the sales of existing ice cream products are also increased. The extra sales revenue: A) B) C) D) 14. Cost of Capital is: A) B) C) D) 15. the coupon rate of debt. a hurdle rate set by the board of directors each year. the rate of return that must be earned on investments if the firm value is to remain unchanged. the average cost in dollars of the firm's assets. Two considerations that cause a corporation's cost of capital to be different than its investor's required rate of return. A) B) C) D) 16. should not be counted as incremental revenue for the project because the sales come from existing products. are synergistic effects that should be counted as incremental revenue for the project. are cannibalized sales that should be excluded from the analysis. should be included in the analysis, but the cost of the ice cream sold should not since that is a recurring expense. corporate taxes and floatation costs. individual taxes and corporate taxes. individual taxes and dividends. corporate taxes and the earned income credit tax. Jones Company has a target capital structure of 40% debt 10% preferred stock and 50% common equity. The company cost of debt is 8%, its cost of preferred stock is 10%, and its cost of new common stock is 14%. The company's marginal tax rate is 35%. The company decided that the company had the funding needed internally and would not have to issue new common stock. What is the company's WACC ? A) 10.08% B) 6.72% C) 16.8% D) 8.00%