Q1 The investment of $400,000 in a division returns a profit before interest of $25,000.However, head office charges a 5% cost of capital.The return on investment (%) and residual income ($) are

Select one:

a.6.25%; $20,000

b.5%; $25,000

c.5%; $5,000

d.6.25%; $5,000

Q2 A company's weighted average cost of capital was 10.4% in 2011.The company's market value for debt and equity are $400,000 and $600,000, respectively.The company's cost of equity is 12%.What is the company's cost of debt funding?

Select one:

a.10.4%

b.12%

c.9%

d.8%

Q3 The management of PaperPlus, a paperboard manufacturer, expects a return of 20% on investments.The company currently has total assets of $10,000,000, earns a contribution margin of 60% on sales, has variable costs of $3,000,000 and reports profits of $2,000,000.The manager is considering acquiring another factory, which will increase sales by 40% and will maintain a 60% contribution margin on sales.Fixed costs for the new factory will be $1,000,000.What is the maximum amount of investment the company should make in the new factor in order to meet its ROI expectation?

Select one:

a.None of the above

b.$4,000,000

c.$15,000,000

d.$2,800,000

Q4 The Component Division of TransCanada Industries provides components to the Elite Division in the production of grombets.It costs the Component Division a total of $5.50 per unit to manufacture the components, which they then sell to the Elite Division for $8 per unit, allowing for a profit.The Elite Division can purchase the component on the open market at $7.50.What transfer price should be charged between divisions and why?

Select one:

a.$5.50; it is better to charge only the cost to manufacture, to ensure the Elite Division is motivated to purchase internally

b.$7.50; it encourages competitive behaviour and cost control in the Component Division and will help to ensure that the Elite Division purchases internally

c.None of the above

d.$8; it allows for profit for the Component Division