TDN Ltd is deciding whether to invest in a new project. The predicted values of the firm at the end of the year are $45 million in a good economy and $10 million in a poor economy. Each economic outcome is equally likely to occur. The promised debt repayment is $30 million at the end of the year.

The new project would have to be financed by equity and the cost of the investment is $20 million today. If the new project is accepted, the value of the firm at the end of the year will be $70 million in a good economy and $35 million in a poor economy. The discount rate for both bonds and stock is 15 percent. If the main objective of TDN is to keep shareholder value as its primary goal, which of the following statements is CORRECT?

a.

The firm should accept the project as it has a positive NPV for the shareholders.

b.

The firm should reject the project as it has a negative NPV for the shareholders.

c.

The firm should reject the project as it has a negative NPV for the bondholders.

d.

The firm should accept the project as it has a positive NPV for the bondholders.

Which of the following are dubious reasons for mergers:

I) diversification;

II) increase earnings per share (EPS);

III) lower financing costs;

IV) industry consolidation

a.

II and IV only

b.

I only

c.

I, II, and III only

d.

III and IV only

ABC Ltd proposes to invest $15 million in a new financial calculator-making plant. Fixed costs are $3 million per year. A financial calculator costs $10 per unit to manufacture and sells for $30 per unit. If the plant lasts for four years and the cost of capital is 20 percent, what is the break-even level (i.e., NPV = 0) of annual sales? (Assume that revenues and costs occur at the end of each year. Assume no taxes.) Round to the nearest 1,000 units.

a.

440,000 units

b.

420,000 units

c.

150,000 units

d.

450,000 units