HFT 4464 Finance Final Exam

1

Taxes are a relevant cost that should be accounted for in the firm’s weighted average cost of capital.

1

Preferred stock has higher seniority than bonds and common stock

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The cost of capital raised by the issuance of bonds is typically lower than the cost of capital raised from the issuance of preferred stock or common stock

1

The weights in a firm’s weighted average cost of capital should be a measure of the firm’s target capital structure

1

Issuance or flotation costs are the costs investors pay to brokers when they purchase common stock

1

Which of the following is typically not treated as one of the components of capital in cost of capital schedule calculations

1

A firm's weighed average cost of capital is based on investors required rates of return on a firms securities and target capital structure

1

Cost of capital is concerned with the cost of

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Issuance costs cause the cost of funds from securities to be lower than the investor return

1

_______ is the firms minimum required rate of return on investments

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Which has the highest seniority

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Which is the riskiest corporate security

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Funds come from outside the firm

1

The firm reinvests profits and provides funds internally

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Why is external common equity capital more expensive then internal common equity capital

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__________ represents the long-term or permanent sources of the firm’s financing

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Which model is typically used to estimate the cost of using external equity capital

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The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?

1

Tokyo Food Supplies Corporation sold an issue of 12-year bonds. The bonds sold at $980 each. After issuance costs, Tokyo Food Supplies received $975 each. The maturity value is $1,000 each and the coupon rate is 9% and paid annually. What is the after-tax cost of debt for these bonds if Tokyo Food Supplies’ marginal tax rate is 40%?

1

Young’s Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?

1

Spencers Magic Shows Incorporated is financed 100% with equity and intends to remain this way. Spencers’ common stock beta is 0.85, the expected market return (average market return) is 14%, and the risk-free rate is 6%. If all of Spencers’ equity is internal, what are the cost of equity and the weighted average cost of capital for Spencers?

1

Shamas Famous Restaurants expects to pay a common stock dividend of $1.50 per share next year (d1). Dividends are expected to grow at a 4% rate for the foreseeable future. Shamas’ common stock is selling for $18.50 per share and issuance costs are $3.50 per share. What is Shamas cost of internal equity?

1

Marion’s Miraculous Resorts has a current capital structure that is 50% equity, 40% debt, and 10% preferred stock. This is considered optimal. Marion is considering a $40 million capital budgeting project. Marion has estimated the following:

After-tax cost of debt: 8.5%
Cost of preferred stock: 9.5%
Cost of internal equity: 14.0%

If all equity comes from internal sources, what should Marion’s cost of capital be for this project?

1

Which model(s) is used to estimate the cost of using internal equity?

1

The discounted payback period does not take into account the time value of money

1

The net present value is the ratio of a project’s benefits to its costs and the profitability index is the difference between a project’s benefits and its costs

1

A project’s payback period is the amount of time required for the project’s net cash flows to recover or pay back the net investment

1

A project’s net present value is the sum of the future values of the net cash flows compounded at the required rate of return minus the net investment

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If a project’s net present value is positive (negative), the project is generally acceptable (unacceptable).

1

A project’s net present value is a measure of a project’s contribution to firm value

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A capital budgeting project’s internal rate of return is the rate of return causing a project’s net present value to equal the net investment.

1

If a project’s internal rate of return is greater (less) than the required rate of return, the project is generally acceptable (unacceptable).

1

If a capital budgeting project’s cash flows are not normal, the internal rate of return method should be used to make the investment decision

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The net present value, profitability index, internal rate of return, and modified internal rate of return methods will provide consistent investment decisions for independent projects with normal cash flows

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Capital budgeting decisions are based upon cost-benefit analysis. A project’s net investment is compared to the project’s net cash flows in order to make a decision.

1

The purpose for capital budgeting projects are

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When making a capital budgeting decision, cash flows should be estimated on an incremental basis, not a total basis.

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A capital budgeting project’s sunk costs and opportunity costs are both relevant to the project investment decision.

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A project’s net cash flows are typically cash inflows whereas a project’s net investment is typically a cash outflow.

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If a depreciable asset is sold for less than its book value, then taxes must be paid on the difference

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The estimation of a project’s net cash flows (NCF) should not include changes in

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Your university is considering what to do with the current football stadium. They plan to invest to upgrade the current football stadium or invest to build a new one closer to campus. What kind of projects are these?

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Which of the following is a basic principle when estimating a project’s cash flows?

1

What impact will an increase in depreciation have upon a firm?

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Which one of the following would not typically be considered a capital budgeting project for a restaurant?

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Tokyo Food Supplies Corporation is considering an expansion to a new market. Tokyo Food Supplies has already conducted and paid $35,000 for a marketing survey. The expansion will cost $400,000 for new assets, another $25,000 for shipping and delivery costs, and another $70,000 for installation costs. In addition, $150,000 in net working capital will be needed immediately. Compute the net investment.

1

Poon’s Noodle House is considering replacing their noodle-processing machine. The current machine was purchased 4 years ago at a total cost of $20,000. It is being depreciated straight-line to a zero value over 8 years. If Poon sells the noodle-processing machine for $6,000, what is the after-tax cash flow to Poon’s Noodle House? Use 40% for the effective tax rate.

1

Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost $300,000 including delivery and installation. The old equipment to be replaced has a book value of $100,000 and can be sold pre-tax for $120,000. If the firm’s effective tax rate is 40%, compute the net investment.

1

A project is expected to increase a firm’s sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project’s expected annual net cash flow? Use a 40% effective tax rate.

1

A project is expected to increase a firm’s sales revenue by $12,000 annually, decrease it cash expenses by $18,000 annually, and increase its depreciation by $10,000 annually. Given this information, what is the project’s expected annual net cash flow? Use a 40% effective tax rate.

1

The discounted payback period does not take into account the time value of money

1

A project’s payback period is the amount of time required for the project’s net cash flows to recover or pay back the net investment.

1

If a project’s net present value is positive (negative), the project is generally acceptable (unacceptable).

1

A project’s net present value is a measure of a project’s contribution to firm value

1

If a project’s internal rate of return is greater (less) than the required rate of return, the project is generally acceptable (unacceptable).

1

Which one of the following capital budgeting decision methods measures how long it takes for a project’s benefits to recover the project’s cost?

1

The payback period is a useful measure of a project’s

1

What is the profitability index for an acceptable capital budgeting project?

1

Which of the following is true for 5-year project with a 3-year payback period?

1

Which of the following is true about the net present value method?

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A capital budgeting project has a net investment of $450,000 and is expected to generate net cash flows of $150,000 annually for 5 years. What is the net present value at a 15% required rate of return?

1

A capital budgeting project has a net investment of $1,000,000 and is expected to generate net cash flows of $350,000 annually for 4 years. What is the internal rate of return?

1

A capital budgeting project is expected to have the following cash flows:

Year Cash Flows
0 −$850,000
1 $300,000
2 $400,000
3 $500,000
What is the project’s payback period?

1

A capital budgeting project is expected to have the following cash flows:

Year Cash Flows
0 −$850,000
1 $300,000
2 $400,000
3 $500,000
What is the project’s net present value at an 18% required rate of return?

1

A capital budgeting project is expected to have the following cash flows:

Year Cash Flows
0 -$1,000,000
1 $400,000
2 $500,000
3 $700,000
What is the project’s internal rate of return?

1

Which of these measures profitability of a project

1

Which of these measures risk and liquidity of a project

Ch 8-10

HFT 4464 Finance Final Exam

Taxes are a relevant cost that should be accounted for in the firm’s weighted average cost of capital.

Preferred stock has higher seniority than bonds and common stock

The cost of capital raised by the issuance of bonds is typically lower than the cost of capital raised from the issuance of preferred stock or common stock

The weights in a firm’s weighted average cost of capital should be a measure of the firm’s target capital structure

Issuance or flotation costs are the costs investors pay to brokers when they purchase common stock

Which of the following is typically not treated as one of the components of capital in cost of capital schedule calculations

A firm's weighed average cost of capital is based on investors required rates of return on a firms securities and target capital structure

Cost of capital is concerned with the cost of

Issuance costs cause the cost of funds from securities to be lower than the investor return

_______ is the firms minimum required rate of return on investments

Which has the highest seniority

Which is the riskiest corporate security

Funds come from outside the firm

The firm reinvests profits and provides funds internally

Why is external common equity capital more expensive then internal common equity capital

__________ represents the long-term or permanent sources of the firm’s financing

Which model is typically used to estimate the cost of using external equity capital

The cost of raising capital with debt is typically less costly for a firm than raising capital with preferred stock. Which one of the following is one of the reasons for this?

Young’s Specialized Cruises plans to issue preferred stock at a price of $25 per share. The annual dividend will be $2.18 per share and issuance costs are expected to be $2.00 per share. What is the cost of raising funds with preferred stock for Young?