Please answer questions 1-7 with the following information Keith Urban Bookstores is considering a major expansion of its business. The details of the proposed expansion project are summarized below: The company will have to purchase $500,000 in equipment at t-0. This is the depreciable cost. . . The project has an economic life of four years. . The cost can be depreciated on a MACRS 3-year basis, which implies the following depreciation schedule: MACRS Depreciation Year 0.33 0.45 0.15 0.07 At t-0, the project requires that inventories increase by $50,000 and accounts payable increase by $10,000. The change in net operating working capital is expected to be fully recovered at t 4. (Hint: NWC CA-CL) The project's salvage value at the end of four years is expected to be $o. e The company forecasts that the project will generate $800,000 in sales the first two years (t 1 and 2) and $500,000 in sales during the last two years (t 3 and . e Each year the project's operating costs excluding depreciation are expected to be 60% of sales revenue. The company's tax rate is 40%. The project's cost of capital is 10%. 1. What is CFFA at year 0? a. $540,000 b. -$560,000 c. -$570,000 d. -$500,000 2. What is CFFA at year 4? a. $150,000 b. $174,000 c. $282,000 d. $500,000 3. What is CFFA at year 2? a. $282,000 b. $290,000 c. $275,000 d. $320,000 4. What is the Depreciation for year 3? a. $165,000 b. 75,000 c. $125,000 d. $225,000 5. What is the Depreciation Tax Shield benefit at year 1? a. $66,000 b. $30,000 c. $50,000 d. $90,000 6. What is the NPV of this project? a. $173,987 b. $159,145 c. $27,456 d. $ 90,326 7. Should this project be undertaken? a. Yes b. No 8. Sensitivity analysis looks at the most reasonably optimistic and pessimistic results for a project. risk. potential outcomes is acceptable. revenue and the costs simultaneously will change the net present a. b. helps identify the variable within a project that presents the greatest forecasting c. is generally conducted prior to scenario analysis just to determine if the range of d. illustrates how an increase in operating cash flow caused by changing both the value for a project. 9. A company is considering a new project. The CFO plans to calculate the project's NPV by first estimating the relevant cash flows for each year of the project's life (the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company's WACC. Which of the following factors should the CFO INCLUDE IN THE CASH FLOWS when estimating the relevant cash flows? a. All sunk costs that have ben incurred relating to the project. b. c. The investment in working capital required to operate the project, even if that d. Sunk costs that have been incurred relating to the project, but only if those costs e. Effects of the project on other divisions of the firm, but only if those effects lower All interest expenses on debt used to help finance the project. investment will be recovered at the end of the project's life. were incurred prior to the current year the project's own direct cash flows. 10. You are analyzing a project and have developed the following estimates. The depreciation is $3,200 a year and the tax rate is 34 percent. What is the Best-Case operating cash flow? Unit sales Sales price Variable cost per unit 1.700 $31 $17 $6.500 1.650 $29 $16 $5.000 1.750 $33 $18 $8,000 Fixed costs a. -$13,473 b. $19,288 c. $16,701 d. $17,423 Blake Shelton Company's bonds, with 10% coupon rate, mature in 10 years and have a par value of $1,000. The market interest rate for the bonds is 8.5%. What is the bond's price? (Semi-annually compounding) 11, a. 916.11 b. 750.06 c. $817,513 d. $1,045.00 e. $1,099.71 Sam Hunt Enterprises' non-callable bonds currently sell for $1,165. They have a 15-year maturity with yield to maturity of 7.63%, what is their coupon rate? (semi-annually compounding) 12. a. b. c. d. e, 7.50% 8.70% 9.50% 6.35% 10% 13. Which of the following has the highest interest rate risk? a. b. 10-year Corporate bond with rating of AAA 10-year Treasury bond 10-year convertible bond d. 10-year zero coupon bond Which of the following statements is/are INCORRECT? a. Bond sells well above par value when yield to maturity is higher than its coupon b. 14. rate. Convertible bond can be converted into certain amount of cash at the discretion of CEO of the firm. Most bonds are trading in the NYSE market. All of the statements above are incorrect. Statements b and c are incorrect. c. d. e. 15. Which of the following statements is/are most cORRECT? a. A yield curve depicts an inverse relationship between bond price and yield to maturity b. The primary purpose of protective covenants is to help protect bondholders from C. d. e. issuer actions. Junk bonds typically provide a lower yield to maturity than investment grade bonds. Sinking funds may be used to purchase bonds in the open market. Both b and d are correct. Please answer questions 16-17 with the following information A and B are mutually exclusive projects. The required rate of return is 10%. The cutoff period is 2 years. . Year Project A Project B 1,0001080 1000 300 -00 $1,000 -1ooo 500 400-100 300 100 3D 2.00 400. 675 175 16. If the company applies IRR decision, which project should be recommended? Project A because it has IRR of 11%. Project A because it has IRR of 14.49%. Project B because it has IRR of 13.55%. Project B because it has IRR of 5.06%. a. c. d. 17. If the company applies payback period decision, which project should be recommended? a. Project A because it has payback of 2.33 years. b. Project A because it has payback of 2.107 years. c. Project B because it has payback of 2.33 years. d Project B because it has payback of 3.30 years. e. Neither of two projects is recommended. 18. Disadvantages of the payback method include the following. a. It ignores the time value of money. b. It is inconsistent with the goal of maximizing shareholder wealth It ignores cash flows beyond the payback period. d. All of the above. 19. Which of the following statements is/are CORRECT? An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. a. b. An example of an externality is a situation where a bank opens a new office, and that new office causes deposits of the bank's other offices to decline. c. The externality always yields a negative NPV. d. The identification of an externality has often led to an increase in the calculated NPV Both b and c are correct. e. 20. Which of the following statements is/are INCORRECT? All else equal, if a bond's yield to maturity increases, its price will fall. T The firm is likely to call a bond for early redemption when the bond is downgraded. All else equal, a 20-year bond has higher interest rate risk than 5-year bond. T d. Both a and b are incorrect. e. Both b and c are incorrect Use the following information for a particular stock: g long-term growth of 5%; its required rate of return is 10%; its last dividend was $2. What is the stock's terminal price (at t 3)? 21. 20% for 3 years before achieving a. $58.95 b. $64.82 c. $72.58 d. $68.77 22. Which of the following statements is CORRECT? a. All common stocks fall into one of three classes: A, B, and C b. All firms have several classes of common stock. c. The constant growth model takes into consideration the capital gains that investors expect to earn on a stock. d. If two stocks have the same required return and the same price, the two stocks must have the same dividend yield. 23. The stock is expected to pay dividend of $3.0 and currently is selling at $30. What is its expecteddividend yield? If the dividend is expected to grow at constant rate of 5%, what is its total return? a. b. . d. 1596; 10% 10% 15% 896; 14% 1296,6% Stock x is expected to pay a dividend of $3.00 at the end of the year, i.e, D, - $3.00, and that dividend is expected to grow at a constant rate of 6% a year. The stock currently trades at a price of $50 a share. Assume that the stock is in equilibrium, that is, the stock's price equals its intrinsic value. Which of the following statements is CORRECT? 24. The stock's required return is 10%. a. b. The stock's expected dividend yield and growth rate are equal. c. The stock's expected dividend yield is 5%. d. The stock's expected capital gains yield is 5%. There are two open seats on the board of directors. If two separate votes occur to elect the new directors, the firm is using a type of voting that is best described as voting 25. a. straight b. simultaneous c. cumulative d. proxy