Question 1 . 2 out of 2 points Correct 1. The most common motive for adding fixed assets to the firm Is answr : a. Expansion Question 2 Correct 2. ________ is the process of evaluating and selecting long-term investments consistent with the firm's goal of wealth maximization. Selected Answer: b. Capital Budgeting Question 3 . 0 out of 2 points Incorrect 3. Consider the following cash flow pattern. In year zero: capital expense = $100,000; year 1 cash inflow = $25,000; year 2 cash inflow = $10,000; year 3 cash inflow = $50,000; year 4 cash inflow = $60,000. This cash flow pattern is best described as a(n): Selected Answer: c. annuity and a non-conventional cash flow . Question 4 . 2 out of 2 points Correct 4. ________________projects do not compete with each other, the acceptance of one ___________ the others from consideration. Selected Answer: b. Independent; does not eliminate Question 5 . 2 out of 2 points Correct 5. A firm with limited dollars available for capital expenditures is subject to: Selected Answer: d. d. Capital rationing Question 6 . 2 out of 2 points Correct 6. The ____________ is the exact amount of time it takes the firm to recover its initial investment Selected Answer: d. d. Payback Question 7 . 2 out of 2 points Correct 7. All of the following are weaknesses of the payback method except: Selected Answer: a. a. it is easy to calculate Question 8 . 2 out of 2 points Correct 8. A firm is evaluating a proposal which has an initial investment of $35,000 and has cash inflows of $10,000 in year one; $20,000 in year two; and $10,000 in year 3. The payback period of the project is: Selected Answer: d. between 2 & 3 years Question 9 . 2 out of 2 points Correct 9. A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash inflows presently valued at $4,000. The NPV pf the investment is: Selected Answer: a. - $1,000 Question 10 . 2 out of 2 points Correct 10. The _________________ is the discount rate that equates the present value of the cash inflows with the initial investment. Selected Answer: d. IRR . Question 11 . 0 out of 2 points Incorrect 11. A firm with a cost of capital of 12.5% is evaluating 3 capital projects. The IRRs are as follows: Project IRR 1 12% 2 15% 3 13.5% The firm should: Selected Answer: e. accept all projects . Question 12 . 2 out of 2 points Correct 12. When NPV is negative, the IRR is ______________ the cost of capital. Selected Answer: c. less than Question 13 . 2 out of 2 points Correct 13. In comparing NPV to IRR: Selected Answer: b. NPV is theoretically superior, but financial mangers prefer IRR Question 14 . 2 out of 2 points Correct 14. In the context of capital budgeting, risk refers to: Selected Answer: a. the degree of variability of the cash inflows Question 15 . 0 out of 2 points Incorrect 15. The initial investment for replacement decisions includes all of the following except: Selected Answer: c. a subtraction of the sale of the old machine that is being replaced . Question 16 . 0 out of 2 points Incorrect 16. The four basic sources of long-term funds for a business are: Selected Answer: b. current liabilities, long-term debt, common stock and retained earnings Question 17 . 2 out of 2 points Correct 17. The higher the risk of a project, the higher its RADR and thus the lower the NPV for a given stream of inflows. Selected Answer: True Question 18 . 0 out of 2 points Incorrect 18. The firm's optimal mix of debt and equity is called its: Selected Answer: a. optimal ratio Question 19 . 2 out of 2 points Correct 19.? The ____________________ is the weighted average cost of funds which relates the interrelationahip of financial decisions. Selected Answer: c.? cost of capital Question 20 . 2 out of 2 points Correct 20. A tax adjustment must be made in determining the cost of ____________. Selected Answer: a. long-term debt Question 21 . 2 out Correct 21. The before tax cost of debt for a firm which has a marginal tax rate of 40%, is 12%. Therefore the interest rate that should be included in the cost of capital is: Selected Answer: c. 7.2% Question 22 . 2 out of 2 points Correct 22. Debt is generally the least expensive source of capital. This is primarily due to: Selected Answer: c. the tax deductability of interest payments . Question 23 . 2 out of 2 points Correct 23. The cost of common equity may be estimated by using the: Selected Answer: c. the Gordon model; r = D/P + g Question 24 . 2 out of 2 points Correct 24. The investment opportunity schedule (IOS) combined with thee WACC indicates: Selected Answer: c. which projects are acceptable Question 25 . 25. As the cummulative amount of money invested in capital projects increases, its return on the projects increases. Selected Answer: False Question 26 26. BONUS The cost of capital can be thought of as the rate of return required by market suppliers of capital in order to attract their funds to the firm. Selected Answer: TRUE Question 27 Incorrect 27. BONUS Sunk costs are cash outlays that may have a substantial impact on the capital budgeting decision and should be included in the initlal investment calculation. Selected Answer: False Question 28 . 2.5 out of 5 points Partial Credit NOTE: FOR ALL PROBLEMS YOU MUST (as in MUST!) SHOW ALL WORK - if you just give an answer I will mark it wrong. P-1. What is the payback for a project that has anticipated cash inflows of $10,000 for 5 years and a cost of $22,000? Selected Answer: Payback = time it takes a firm to recover its initial investment =$22,000- $10,000(year 1), less $10,000(year 2)= $2,000 = $2,000/$22,000= 0.0909 = 2years +0.090909 Payback =2.1 years. Response Feedback: formual for payback is initial investment/annual cash flow . Question 29 . 1 out of 10 points Partial Credit P-2.? Good old XYZorp (they're back!)? is considering two mutually exclusive projects, A & B in order to expand their product line.? After letting the cost accountants out of their cages, it was determined that project A's initial investment must be $42,400, while project B will cost $60,000. Project A has projected cash inflows of $25,000 per year for three years.? Project B's inflows are more variable:? $10,000 in year 1; $30,000 in year 2; and $40,000 in its final year. The firm's cost of capital is 12%.? YES - this IS important! Using NPV analysis, if the NPV for project? B = + $ 1,320 (yes, I did the computation for you!), which project do you prefer?? In other words - which project will have the higher NPV. Selected Answer: The net present value of project B is as follows: It is already given as $1,320 Analysis: The project A is should be preferred as it has higher net present value. The IRR of the project A is as follows: o yr = - 42,400 * 1.00 = - 42400.00 = 42,4000- 60045.00=17645.00 3 year = 25000 * 2.40 = 60045.00 discount cash flow =42,400/17,645 3 yr =2.4029 Response Feedback: Needed to use formula provided for chapter 10 NPV; This problem asked for NPV, not IRR Question 30 . 0 out of 10 points Incorrect P-3. Given the information for project A in problem P-2, what is this project's IRR? Selected Answer: 3 yr =2.4029 the projects IRR is 12% Response Feedback: Needed to use formula provided for IRR. Incorrect answer; incorrect process . Question 31 . 10 out of 10 points Correct P-4. Assuming a target capital structureof: 40% debt 20% preferred stock 40% common equity What would be the WACC given the following: all debt will be from the sale of bonds with a coupon of 10% (assume no flotation costs), preferred stock's associated cost will be 13%, and common equity will be from retained earnings with an associated cost of 15%. The tax rate for this corporation is 30%. Selected Answer: Wacc = .4* 10*( 1 -0.3) + .2* 13 + .4 * 15 = 11.4% Response Feedback: [None Given] . Question 32 . 15 out of 15 points Correct A note to students on this problem.? yes, it is a bit involved so think about what information you will need to develop in order to answer the questions.?Hint:? ?You might want to take a look at Figure 12.4 on page 486.? I do not expect you to send me a graph, but you might find figure 12.4 helpful in figuring out what you need to know. P-5.? The Acme Chip Manufacturing Company (potato not computer) has a target capital structure of 40% debt and 60% common equity.? They also have a 40% tax rate.? HINT:? you need this to calculate the "after-tax" cost of debt! ?They have three projects under consideration code named:? Manny, Moe, and Jack.? All are independent. The IRRs for the three projects: ???? Manny????? 16% ???? Moe????????? 13% ???? Jack???????? 10% All three projects have an initial investment of $1,000,000. Acme can borrrow up to $2,000,000 from the bank at a quoted interest rate (the "before-tax" cost of debt) of 8%.? They also have a reported $3,000,000 in Retained Earnings available for new projects.? Additional information:? The next common stock dividend they pay will be $4.00 per share.? They also expect a growth rate of 5% on common equity.? New common stock can be sold for $50.00 per share, with flotation costs of $10.00 per share.? Now if I were mean I would have you now calculate the "cost of issuing new common stock" - see page 368 in your text - as you have all the data you need.? OK - so I'm mean - BUT (hint time) if I were you at this point I'd go to page 368 and use equation 9.8 to figure out that cost of using new common stock!? But remember - it's always cheaper to use retained earnings than issuing new common stock.? Soooo as long as they have retained earnings to use (as they DO in part 1) you don't have to sell new common for part 1.? For part two on the other hand ... Part 1:? a.?? Which projects would you accept and why?? Yes, I need to see some "number crunching". b.? What would be your capital budget? Part 2:? Let's change one thing.? The federal government has decided to increase the regulations affecting the manufacturing of chips.? Complying with these new regulations will cost Acme $3 million, wiping out their retained earnings.?So now: a. Which projects would you accept and why?? More number crunching please! b.? What would be their capital budget now? Selected Answer: Part1) a)after tax cost of debt=8%(1-.40)=4.8% cost of issuing new common stock=0 as they used retained earnings. cost of equity=growth rate+Expected Dividend yield= 5%+(4/50)=.13=13% cost of capital=.40*(4.8%)+.60*13%= 9.72% As IRR of all the three projects is >required cost of capital of 9.72%, we should accept all the three projects. b)Capital Budget would be total investment in the three projects of $1,000,000*3=$3,000,000 Part 2) wacc for capital structure of 40:60 (40% * cost of debt )+ 60% cost of common stock = 10.92% a the manny and joe are acceptd as the IRR of both are more than wacc of 10.92% b total capital budget will be $2,000,000 Response Feedback: [None Given]