Simple explanations for the problems would be appreciated.

Homework 3 (11/16) 1- Company XYZ has the following opportunity to invest in a project with a return of $77,000 in one period. The current investment is $69,000. The financial market rate is 12%. What is the NPV and the investing decision? A. $250; yes B. $280; yes C. -$250; no 2- The net present value of a project is ______. A. all current revenue minus all current costs B. the present value of future cash flows minus initial costs C. the present value of future cash flows netting out those cash flows that occur after the relevant period D. the present value of future cash flows netting out those cash flows that occur with risk E. the present value of positive future cash flows 3- Which of the following amounts is closest to the net present value of a project that contributes $5,000 at the end of the first year and $8,000 at the end of the second year? The initial cost is $3,000. The appropriate interest rate is 8% for the first year and 9% for the second year. A. $8,585 B. $8,426 C. $8,363 4- Tom and Erdal are planning on forming the Top-Torque Company. The company is to specialize in diesel engine rebuilding for extractive industries. The investment cost is expected to be $1.5 million and have aftertax cash flows of $100,000 in year 1, $250,000 in year 2, and $300,000 thereafter indefinitely. The two owners estimate that this is a risky venture and requires a 17% rate of return. What is the value of Top-Torque, and should the investment be made? A. $57,240; yes B. $1,557,240; yes C. -$57,240; no 5- An investment with an initial cost of $16,000 produces cash flows of $5000 annually. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the payback period is ______ years. A. 3.20 B. 2.91 C. 3.33 1 6- An investment costs $77,500 and pays $27,500 a year for four years. What is the IRR of this investment? A. 22.3% B. 24.4% C. 15.6% 7- Michael undertakes an investment with an initial investment of $10,000, and he expects to receive $3,500 a year for the next four years. If the required return is 15%, what is the NPV? A. $5.49 B. $4.63 C. -$7.58 8- The IRR is defined as the ______. A. discount rate that makes the NPV equal to zero B. difference between the cost of capital and the pr esent value of the cash flows C. discount rate used in the NPV method 9- Saline Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the IRR for the project. A. 14.5% B. 18.6% C. 23.4% 10- A firm has a debt-to-equity ratio of .50. Its cost of debt is 12%. Its overall cost of capital is 14%. What is its cost of equity if there are no taxes or other additional costs? A. 13% B. 16% C. 15% 11- A firm has a total asset value of $1 million and debt valued at $400,000. What is the weighted average cost of capital if the after-tax cost of debt is 12% and the cost of equity is 15%? A. 13.2% B. 13.8% C. 27.0% 12- AC Ltd. has preferred stock that pays a $1.25 dividend per share and sells for $25 dollars a share. What is the cost of preferred stock? A. 4.75% B. 5% C. 20% 2 13- Assume the risk-free interest rate is 7% and the market return is 12%. If the beta of a stock is 1.4, according to CAPM, what is the required rate of return on the stock? A. 7% B. 9.5% C. 14% 14- A company has a constant return on equity of 12% and a payout ratio equal to 35%. If the company expects to pay a dividend of $2 and has a stock price equal to $24, what is the expected rate of return? A. 7.8% B. 12% C. 16.13% 15- A company wants to determine the cost of equity to use in calculating its weighted average cost of capital. The controller has gathered the following information: Rate of return on 10-year Treasury bonds: 3.5% Market equity risk premium: 6.0% The company's estimated beta: 1.6 The company's after-tax cost of debt: 8.0% Risk premium of equity over debt: 4.0% Corporate tax rate: 35% Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is closest to ______. A. 8.5 B. 1 1.6 C. 13.1 3