show work for question #1. 1. Burns and Nuble is considering an investment in a project which would require an initial outlay of $320,000 and produce expected cash flows in years 1-5 of $87,385 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows: Cost of Long-Term Debt 8% Cost of Preferred Stock 12% Cost of Common Stock 16% Long term debt currently makes up 20% of the capital structure, preferred stock 10%, and common stock 70%. What is the net present value of this project? a. -$13,876 b. $0 c. $287,692 d. -$20,000 3. Which of the following transactions will lower a companys financial leverage? a. a mortgage loan is obtained and the proceeds are used to pay off existing short-term debt b. preferred stock is sold and the proceeds are used to pay off existing short-term debt c. common stock is sold and the proceeds are used to pay off existing short-term debt d. short-term debt is obtained to get the company through a period of negative net income and cash flow 4. Abrams Steel Company has very high operating leverage due to the capital intensive nature of the steel business. Abrams CEO is concerned about the variability in the firms EPS if sales should drop, and decides to take action. Which of the following will reduce the variability in the firms EPS for a given change in sales? a. The CEO may increase the firms financial leverage and hence reduce the variability by using non-shareholder money to support the business. b. The CEO may decrease the firms financial leverage, thus lowering the firms total leverage. c. The CEO may increase the firms total leverage by raising money from the sale of common stock. d. The CEO may issue more corporate bonds and use the proceeds to pay off short-term liabilities. 5. Ames Drilling Corp. reported that its sales and EBIT increased by 10%, but its EPS increased by 30%. The much larger change in earnings per share could be the result of ________. a. high operating leverage b. high financial leverage c. a high percentage of credit sale collections from prior years d. high fixed costs of production