Question
I need help with some of the finance questions. Thank you! 1. Terry Malloy is trying to decide whether his shipping company should invest in
I need help with some of the finance questions. Thank you!
1. Terry Malloy is trying to decide whether his shipping company should invest in a new boat.The new boat will cost $200,000 and it will be fully-depreciated on a straight-line basis over its 10-year useful life.The new boat will have no salvage value.The new boat is expected to increase EBITDA by $50,000 per year for 10 years.What is the NPV of this investment if the corporate income tax rate is 50 percent and the cost of capital is 10 percent?
2. Which of the following statements is FALSE?
A. We need to know the cost of capital (WACC) in order to use the NPV rule.
B. If the cost of capital (WACC) is less than the IRR, the NPV will be positive.
C. In order to maximize shareholder wealth, reject capital budgeting projects with a negative NPV.
D. When faced with a set of alternative investments, choose the one with the lowest NPV in order to minimize the present value of the costs.
3. When discounting dividends for the purpose of common stock valuation you should use:
a. the weighted average cost of capital.
b. the after tax weighted average cost of capital.
c. the equity cost of capital.
d. the before tax cost of debt.
4. Waterfront Manufacturing Company is purchasing a production facility at a cost of $21,000,000. The firm expects the project to generate annual free cash flows of $7,000,000 over the next five years.They also expect to sell the facility at the end of five years for an after-tax salvage value of $5,000,000.Its cost of capital is 20 percent.What is the net present value (NPV) of this project?
5. Droz's Hiking Gear Company has found that its common equity shares have a beta equal to 1.50 while the risk-free return is 12 percent and the market risk premium is 6 percent. It has 10-year bonds outstanding with a market price of $1,000, a face value of $1,000, and an annual coupon rate of 15 percent.The total market value (debt plus equity) of the firm is $20,000,000.What is the market value of the firm's debt if the firm's WACC is 18 percent and the firm is subject to a 40 percent marginal tax rate?
6. Comet Pasta Company stock currenly sells for $137.50 per share.The Company JUST PAID a dividend and that dividend is not expected to grow at all for the next two years, and then it will grow at a constant rate of 10 percent thereafter.What was the amount of the dividend that was just paid if the required rate of return on the stock is 20 percent
7. The preferred stock of Acme International is currently selling for $200 per share. If your required rate of return is 10 percent, what is the dividend paid by this stock?
8. Which of the following statements is FALSE?
A. Depreciation is not a cash expense paid by the firm.
B. Depreciation expenses have a positive impact on free cash flow.
C. Depreciation expenses have a negative impact on free cash flow.
D. Firms often report a different depreciation expense for accounting and for tax purposes.
9. The internal rate of return rule can result in the wrong decision if:
A. the projects being compared are independent.
B. the projects being compared have normal cash flows.
C. the projects being compared are independent and have normal cash flows.
D. the projects being compared are mutually exclusive.
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