Q1. You purchase a machine for $200,000 which belongs in a 30% CCA class. What is the present value of the CCA tax shield on the machine if it is sold at the end of the sixth year for $24,000, your tax rate is 35%, and the appropriate discount rate is 10%?

Select one:

a. $46,557

b. $66,623

c. $86,994

d. $52,215

e. $40,143

Q2. Al's Audio has a cost of debt of 7 percent, a cost of equity of 12 percent, and a cost of preferred stock of 8 percent. The weight for debt is 0.16, the weight for preferred shares is 0.34, and the weight for common stock is 0.5. The company's tax rate is 34 percent. What is the weighted average cost of capital for Al's Audio Shop?

Select one:

a. 6.54 percent

b. 9.46 percent

c. 9.68 percent

d. 6.14 percent

e. 9.15 percent

Q3. Which of the following is correct regarding agency costs?

Select one:

a. Company paid club memberships for executives are an example of indirect agency costs.

b. Direct costs occur when managers buy assets considered unnecessary by the firm's owners.

c. Direct costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take.

d. Indirect costs occur when shareholders must incur costs to monitor the manager's actions.

e. Direct costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take

Q4. The pure play approach:

Select one:

a. Is easier to implement than the subjective approach.

b. Cannot be used to find the cost of capital for a division.

c. Can be used if the firm has preferred stock outstanding.

d. Is most useful when each division makes a multitude of different products.

e. Should be used only if a firm has more than three divisions.