FIN5063 W7 Quiz

FIN--5063-OL1--OL-FA-2021 - Corporate Finance

Started on	Sunday, October 10, 2021, 8:53 PM
State	Finished
Completed on	Sunday, October 10, 2021, 9:15 PM
Time taken	21 mins 16 secs
Grade	7.00 out of 10.00 (70%)

Question 1

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Which of the following statements is correct?

Select one:

a.

The weights of debt and equity should be based on values from the balance sheet because this is the most accurate assessment of the valuation.

b.

The weighted average cost of capital is calculated on a before-tax basis.

c.

All of these statements are correct.

d.

An increase in the market risk premium is likely to increase the weighted average cost of capital.

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The correct answer is: An increase in the market risk premium is likely to increase the weighted average cost of capital.

Question 2

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Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business:

Select one:

a.

two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.

b.

one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.

c.

All the answers make this a true statement.

d.

one would like to find more than one or two pure-play proxies.

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The correct answer is: All the answers make this a true statement.

Question 3

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Which of the following is most correct?

Select one:

a.

Firms should use historical costs rather than marginal costs of capital.

b.

An increase in the risk-free rate will increase the cost of equity.

c.

All of these statements are equally correct.

d.

When comparing two firms within the same industry, most analysts calculate the weighted average cost of capital on a before-tax basis to facilitate comparisons.

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The correct answer is: An increase in the risk-free rate will increase the cost of equity.

Question 4

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Which of the following statements is true?

Select one:

a.

The new project's risk is not a factor in determining its cost of capital.

b.

If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.

c.

If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.

d.

If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.

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The correct answer is: If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.

Question 5

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When calculating the weighted average cost of capital, weights are based on:

Select one:

a.

market values.

b.

book weights.

c.

book values.

d.

market betas.

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The correct answer is: market values.

Question 6

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Relative to a typical level of risk for Company Z’s projects, project A is twice as risky, project B is half as risky, and project C is of about the same risk. Thus firm WACC should be used to discount cash flows for project(s) _____ , and project-specific WACC should be used for project(s) _____ .

Select one:

a.

A and C; B

b.

C; A and B

c.

B; A and C

d.

A and B; C

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The correct answer is: C; A and B

Question 7

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Which of these statements is true regarding divisional WACC?

Select one:

a.

Using a firmwide WACC to evaluate new projects would have no impact on projects that present less risk than the firm's average beta.

b.

Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.

c.

Using a divisional WACC versus a WACC for the firm's current operations will result in quite a few incorrect decisions.

d.

Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present less risk than the firm's average beta.

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The correct answer is: Using a simple firmwide WACC to evaluate new projects would give an unfair advantage to projects that present more risk than the firm's average beta.

Question 8

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Which of these makes this a true statement? The WACC formula

Select one:

a.

uses the pre-tax costs of capital to compute the firm's weighted cost of debt financing.

b.

All of these make it a true statement.

c.

uses market values to determine weights.

d.

uses costs (required rates of return) adjusted for inflation.

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The correct answer is: uses market values to determine weights.

Question 9

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Which of following is a situation in which we would most likely use the CAPM approach for estimating the component cost of equity?

Select one:

a.

When we are able to estimate the market risk premium with a high degree of confidence.

b.

When the firm pays a constant dividend.

c.

When we are able to estimate the firm's beta with a high degree of confidence.

d.

When we are able to estimate the risk-free rate with a high degree of confidence.

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The correct answer is: When we are able to estimate the firm's beta with a high degree of confidence.

Question 10

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Which of the statements below is correct?

Select one:

a.

In theory (assuming no estimation errors), using divisional WACC eliminates the possibility of incorrectly accepting or rejecting a project.

b.

Using firm WACC for all projects leads to incorrect acceptance of high risk projects and thus to a decrease in the overall company risk.

c.

In theory, using project-specific WACC for all projects leads to incorrect decisions regarding projects with a typical level if risk.

d.

Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk.

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The correct answer is: Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk.

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FIN--5063-OL1--OL-FA-2021 - Corporate Finance

Started on	Sunday, October 10, 2021, 9:17 PM
State	Finished
Completed on	Sunday, October 10, 2021, 9:35 PM
Time taken	17 mins 23 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

Question 1

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Pumpkin Pie Industries has 7 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $80 per share, the preferred shares are selling for $25 per share, and the bonds are selling for 110 percent of par ($1,000), what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock, preferred stock, and bonds, respectively?

Select one:

a.

84.85 percent, 7.58 percent, 7.58 percent

b.

84.21 percent, 7.52 percent, 8.27 percent

c.

45.45 percent, 41.56 percent, 12.99 percent

d.

44.87 percent, 41.03 percent, 14.10 percent

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The correct answer is: 84.21 percent, 7.52 percent, 8.27 percent

Question 2

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An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 11 percent to evaluate these projects, which project(s) will be incorrectly accepted?

  

Select one:

a.

Projects B and C

b.

Project B

c.

Project D

d.

Project A

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The correct answer is: Project D

Question 3

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Suppose that TipsNToes, Inc.'s capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. If the appropriate weighted average tax rate is 38 percent, what will be TipsNToes' WACC?

Select one:

a.

11.25 percent

b.

6.705 percent

c.

10.186 percent

d.

9.514 percent

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The correct answer is: 10.186 percent

Question 4

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IVY has preferred stock selling for 105 percent of par that pays a 6 percent annual coupon. What would be IVY's component cost of preferred stock?

Select one:

a.

6.30 percent

b.

1.11 percent

c.

99.00 percent

d.

5.71 percent

Feedback

The correct answer is: 5.71 percent

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FIN--5063-OL1--OL-FA-2021 - Corporate Finance

Started on	Sunday, October 10, 2021, 10:32 PM
State	Finished
Completed on	Sunday, October 10, 2021, 10:52 PM
Time taken	20 mins 17 secs
Grade	8.00 out of 10.00 (80%)

Question 1

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A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct?

Select one:

a.

We would first need to assess the opportunity cost of placing a branch in a different location to answer this question.

b.

$20,000 is generated by the new branch bank and therefore it is an incremental cash flow.

c.

Some amount less than the $20,000 is incremental because of complementary effects.

d.

Some amount less than the $20,000 is incremental because of substitutionary effects.

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The correct answer is: Some amount less than the $20,000 is incremental because of substitutionary effects.

Question 2

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In capital budgeting analysis, selling a machine at the end of the project for an amount lower than its book value

Select one:

a.

Results in an after-tax cash flow from the sale of the machine higher than the machine’s market value.

b.

Leads to an adjustment of the machine’s purchase price for the purposes of the project’s cash flow calculations.

c.

Is not possible.

d.

Results in an after-tax cash flow from the sale of the machine lower than the machine’s market value.

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The correct answer is: Results in an after-tax cash flow from the sale of the machine higher than the machine’s market value.

Question 3

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In capital budgeting analysis, using accelerated depreciation (as opposed to straight-line depreciation) results in

Select one:

a.

Higher taxes paid in the later years of the project.

b.

Lower total taxes paid, associated with the project.

c.

Higher taxes paid in the early years of the project.

d.

Higher total taxes paid, associated with the project.

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The correct answer is: Higher taxes paid in the later years of the project.

Question 4

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A new project would require an immediate increase in raw materials in the amount of $10,000. The firm expects that accounts payable will automatically increase $7,500. What will be the impact of the resulting change in the firm's net working capital on the firm's cash flows?

Select one:

a.

+$2,500

b.

-$2,500

c.

-$17,500

d.

+$17,500

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The correct answer is: -$2,500

Question 5

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In capital budgeting analysis, using accelerated depreciation (as opposed to straight-line depreciation) results in

Select one:

a.

Higher net cash flows in the early years of the project.

b.

Higher total net cash flows for the project.

c.

Lower total net cash flows for the project.

d.

Lower net cash flows in the later years of the project.

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The correct answer is: Higher net cash flows in the early years of the project.

Question 6

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All of the following are incremental cash flows attributable to the project EXCEPT:

Select one:

a.

complementary effects.

b.

opportunity costs.

c.

substitutionary effects.

d.

financing costs.

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The correct answer is: financing costs.

Question 7

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If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a:

Select one:

a.

obligated cost.

b.

complementary cost.

c.

sunk cost.

d.

committed cost.

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The correct answer is: sunk cost.

Question 8

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In capital budgeting analysis, selling a machine at the end of the project for an amount higher than its book value

Select one:

a.

Results in an after-tax cash flow from the sale of the machine lower than the machine’s market value.

b.

Results in an after-tax cash flow from the sale of the machine higher than the machine’s market value.

c.

Leads to an adjustment of the machine’s purchase price for the purposes of the project’s cash flow calculations.

d.

Is not possible.

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The correct answer is: Results in an after-tax cash flow from the sale of the machine lower than the machine’s market value.

Question 9

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AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of

Select one:

a.

incremental cash flow.

b.

relevant cash flow.

c.

sunk cost.

d.

opportunity cost.

Feedback

The correct answer is: sunk cost.

Question 10

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Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as:

Select one:

a.

sunk effects.

b.

complementary effects.

c.

substitutionary effects.

d.

marginal effects.

Feedback

The correct answer is: substitutionary effects.

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FIN--5063-OL1--OL-FA-2021 - Corporate Finance

Started on	Sunday, October 10, 2021, 10:53 PM
State	Finished
Completed on	Sunday, October 10, 2021, 10:56 PM
Time taken	2 mins 34 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

Question 1

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of three years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, and 17.49% in years 1, 2, and 3 respectively). Revenue from the new game is expected to be $800,000 per year, with costs of $350,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 0 (ONLY YEAR 0!) estimated after-tax cash flow for this project be?

Select one:

a.

-$220,000

b.

$102,288

c.

-$520,000

d.

$230,000

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The correct answer is: -$220,000

Question 2

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You are evaluating a project for your company. You estimate the sales price to be $300 per unit and sales volume to be 5000 units in year 1; 6000 units in year 2; and 4000 units in year 3. The project has a three-year life. Variable costs amount to $100 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $240,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $60,000. An initial investment of $50,000 in NWC is required at the beginning of the project . The tax rate is 30 percent and the required return on the project is 13 percent. What is the after-tax operating cash flow for the project in YEAR 2 (YEAR 2 ONLY!)?

Select one:

a.

$679,000

b.

$735,000

c.

$759,000

d.

$815,000

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The correct answer is: $759,000

Question 3

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of five years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, 17.49%, 12.49%, and 8.93% in years 1, 2, 3, 4, and 5 respectively). Revenue from the new game is expected to be $700,000 per year, with costs of $350,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 4 (ONLY YEAR 4!) estimated after-tax cash flow for this project be?

Select one:

a.

$131,507

b.

$218,493

c.

$197,260

d.

$152,740

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The correct answer is: $218,493

Question 4

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Your firm needs a computerized machine tool lathe that costs $75,000, requires $10,000 in installation, $10,000 in freight charges, and another $14,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category (depreciation of 33.33%, 44.45%, and 14.81% in years 1, 2, and 3 respectively). Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $10,000 at the end of year 3, what is the after-tax cash flow from selling it?

Select one:

a.

$13,000

b.

$9,112

c.

$10,888

d.

$7,000

Feedback

The correct answer is: $9,112

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 6:24 PM
State	Finished
Completed on	Sunday, December 12, 2021, 6:35 PM
Time taken	10 mins 44 secs
Grade	10.00 out of 10.00 (100%)

Question 1

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Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

Select one:

a.

Average WACC

b.

Proxy WACC

c.

Pure-play WACC

d.

Divisional WACC

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The correct answer is: Divisional WACC

Question 2

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Which of the following statements is correct?

Select one:

a.

All of these statements are correct.

b.

An increase in the market risk premium is likely to increase the weighted average cost of capital.

c.

The weights of debt and equity should be based on values from the balance sheet because this is the most accurate assessment of the valuation.

d.

The weighted average cost of capital is calculated on a before-tax basis.

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The correct answer is: An increase in the market risk premium is likely to increase the weighted average cost of capital.

Question 3

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Which of the following would likely increase the weighted average cost of capital for a company?

Select one:

a.

A decline in the company’s equity beta.

b.

An increase in the market risk premium.

c.

More debt in the company’s capital structure relative to the amount of equity.

d.

A higher marginal tax rate faced by the company.

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The correct answer is: An increase in the market risk premium.

Question 4

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Which of the following statements is true regarding the calculation of component costs for the WACC formula?

Select one:

a.

Preferred stock represents a special case of the constant growth model, wherein the g equals zero.

b.

Preferred stock cannot use the constant growth model.

c.

Common stock represents a special case of the constant growth model, wherein the g equals zero.

d.

Common stock and preferred stock are treated the same when using the constant growth model.

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The correct answer is: Preferred stock represents a special case of the constant growth model, wherein the g equals zero.

Question 5

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Which of the statements below is correct?

Select one:

a.

Most companies use divisional WACC for most projects, while using project WACC for the most important ones.

b.

Most companies use firm WACC for most of their projects, while using project WACC for the most important ones.

c.

Most companies estimate project WACC for most of their projects, using either firm WACC or divisional WACC for the remaining ones.

d.

Most companies use divisional WACC for most projects, while using firm WACC for the most important ones.

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The correct answer is: Most companies use divisional WACC for most projects, while using project WACC for the most important ones.

Question 6

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What is the correct order of the following component costs of capital, from the highest to the lowest?

Select one:

a.

The cost of debt (highest), the cost of preferred equity, the cost of common equity (lowest)

b.

The cost of preferred equity (highest), the cost of common equity, the cost of debt (lowest)

c.

The cost of debt (highest), the cost of common equity, the cost of preferred equity (lowest)

d.

The cost of common equity (highest), the cost of preferred equity, the cost of debt (lowest)

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The correct answer is: The cost of common equity (highest), the cost of preferred equity, the cost of debt (lowest)

Question 7

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Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business:

Select one:

a.

one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.

b.

two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.

c.

one would like to find more than one or two pure-play proxies.

d.

All the answers make this a true statement.

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The correct answer is: All the answers make this a true statement.

Question 8

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Which of the following is a reason why the divisional cost of capital approach may cause problems if new projects are assigned to the wrong division?

Select one:

a.

If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.

b.

Managers in different divisions may use different methods to calculate the WACC.

c.

None of these answers is correct.

d.

The expected return of the new project may be incorrect.

Feedback

The correct answer is: If projects are assigned to the wrong division, the risk of that division may be significantly different than the risk of the project, implying that the project will be evaluated with a divisional cost of capital that is much different from what a project-specific cost of capital would be.

Question 9

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Company A has an outstanding debt of $10,000,000, its interest payments equal $1,500,000 annually, and its marginal tax rate equals 30%. What is the after-tax cost of debt for Company C to be used in its WACC equation?

Select one:

a.

4.67%

b.

15%

c.

4.5%

d.

10.5%

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The correct answer is: 10.5%

Question 10

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Which of the following would likely reduce the weighted average cost of capital for a company?

Select one:

a.

A higher marginal tax rate faced by the company.

b.

Less debt in the company’s capital structure relative to the amount of equity.

c.

An increase in the company’s equity beta.

d.

An increase in the market risk premium.

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The correct answer is: A higher marginal tax rate faced by the company.

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 6:37 PM
State	Finished
Completed on	Sunday, December 12, 2021, 6:43 PM
Time taken	5 mins 56 secs
Grade	9.00 out of 10.00 (90%)

Question 1

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Which of the following is a true statement?

Select one:

a.

To estimate the before-tax cost of debt, it would be best to solve for the Yield to Maturity (YTM) on the firm's existing debt.

b.

To estimate the before-tax cost of debt, it would be best to use the average rate on the firm's debt over the last five years.

c.

To estimate the before-tax cost of debt, it would be best to solve for the Yield to Call (YTC) on the firm's existing debt.

d.

To estimate the before-tax cost of debt, it would be best to use the coupon rate on the firm's existing debt.

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The correct answer is: To estimate the before-tax cost of debt, it would be best to solve for the Yield to Maturity (YTM) on the firm's existing debt.

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Which of the following statements is correct?

Select one:

a.

All of these statements are correct.

b.

The weights of debt and equity should be based on market values because this is the most accurate assessment of the valuation.

c.

The weighted average cost of capital is calculated on a before-tax basis.

d.

A decrease in the market risk premium is likely to increase the weighted average cost of capital.

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The correct answer is: The weights of debt and equity should be based on market values because this is the most accurate assessment of the valuation.

Question 3

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Which of the following is a situation in which you would want to use the constant growth model approach for estimating the component cost of equity?

Select one:

a.

When the firm has multiple divisions.

b.

When the firm has a high level of financial leverage.

c.

When the firm has a low beta.

d.

When the firm's stock is expected to experience constant dividend growth.

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The correct answer is: When the firm's stock is expected to experience constant dividend growth.

Question 4

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Which of these is an estimated WACC computed using some sort of proxy for the average equity risk of the projects in a particular division?

Select one:

a.

Proxy WACC

b.

Divisional WACC

c.

Average WACC

d.

Pure-play WACC

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The correct answer is: Divisional WACC

Question 5

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Which of the following statements is true?

Select one:

a.

If the new project is riskier than the firm's existing projects, then it should be charged a lower cost of capital.

b.

If the new project is riskier than the firm's existing projects, then it should be charged the firm's cost of capital.

c.

If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.

d.

The new project's risk is not a factor in determining its cost of capital.

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The correct answer is: If the new project is riskier than the firm's existing projects, then it should be charged a higher cost of capital.

Question 6

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Which of the following would likely increase the weighted average cost of capital for a company?

Select one:

a.

An increase in the market risk premium.

b.

A higher marginal tax rate faced by the company.

c.

More debt in the company’s capital structure relative to the amount of equity.

d.

A decline in the company’s equity beta.

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The correct answer is: An increase in the market risk premium.

Question 7

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Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business:

Select one:

a.

one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk.

b.

All the answers make this a true statement.

c.

one would like to find more than one or two pure-play proxies.

d.

two (or even one) proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough.

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The correct answer is: All the answers make this a true statement.

Question 8

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Which of the following would likely reduce the weighted average cost of capital for a company?

Select one:

a.

An increase in the company’s equity beta.

b.

Less debt in the company’s capital structure relative to the amount of equity.

c.

An increase in the market risk premium.

d.

A higher marginal tax rate faced by the company.

Feedback

The correct answer is: A higher marginal tax rate faced by the company.

Question 9

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Which of these makes this a true statement? The WACC formula

Select one:

a.

uses costs (required rates of return) adjusted for inflation.

b.

uses market values to determine weights.

c.

uses the pre-tax costs of capital to compute the firm's weighted cost of debt financing.

d.

All of these make it a true statement.

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The correct answer is: uses market values to determine weights.

Question 10

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Which of the statements below is correct?

Select one:

a.

Using firm WACC for all projects leads to incorrect acceptance of high risk projects and thus to a decrease in the overall company risk.

b.

In theory (assuming no estimation errors), using divisional WACC eliminates the possibility of incorrectly accepting or rejecting a project.

c.

Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk.

d.

In theory, using project-specific WACC for all projects leads to incorrect decisions regarding projects with a typical level if risk.

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The correct answer is: Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk.

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 6:49 PM
State	Finished
Completed on	Sunday, December 12, 2021, 6:54 PM
Time taken	5 mins 51 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

Question 1

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FlavR Co. stock has a beta of 1.5, the current risk-free rate is 3, and the expected return on the market is 12 percent. What is FlavR Co's cost of equity?

Select one:

a.

18 percent

b.

21 percent

c.

16.5 percent

d.

25.5 percent

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The correct answer is: 16.5 percent

Question 2

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WC Inc. has a $10 million (face value), 10-year bond issue selling for 97 percent of par that pays an annual coupon of 6 percent. What would be WC's before-tax component cost of debt?

Select one:

a.

5.82 percent

b.

6.41 percent

c.

6.18 percent

d.

16.17 percent

Feedback

The correct answer is: 6.41 percent

Question 3

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An all-equity firm is considering the projects shown as follows. The T-bill rate is 3 percent and the market risk premium is 6 percent. If the firm uses its current WACC of 11 percent to evaluate these projects, which project(s) will be incorrectly accepted?

  

Select one:

a.

Project D

b.

Project A

c.

Project B

d.

Projects B and C

Feedback

The correct answer is: Project D

Question 4

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Pumpkin Pie Industries has 7 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 50 thousand bonds. If the common shares are selling for $80 per share, the preferred shares are selling for $25 per share, and the bonds are selling for 110 percent of par ($1,000), what would be the weights used in the calculation of Pumpkin Pie's WACC for common stock, preferred stock, and bonds, respectively?

Select one:

a.

44.87 percent, 41.03 percent, 14.10 percent

b.

45.45 percent, 41.56 percent, 12.99 percent

c.

84.85 percent, 7.58 percent, 7.58 percent

d.

84.21 percent, 7.52 percent, 8.27 percent

Feedback

The correct answer is: 84.21 percent, 7.52 percent, 8.27 percent

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 6:55 PM
State	Finished
Completed on	Sunday, December 12, 2021, 7:06 PM
Time taken	11 mins 13 secs
Grade	10.00 out of 10.00 (100%)

Question 1

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ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows to be used in evaluating this project except _______________.

Select one:

a.

Interest expense on the loan used to purchase the machine

b.

Installation costs on the new machine

c.

Increases in depreciation expenses as a result of the new machine

d.

Increase in costs as a result of the new machine

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The correct answer is: Interest expense on the loan used to purchase the machine

Question 2

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A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?

Select one:

a.

The lot is NOT an incremental cash flow because it has already been paid for.

b.

The lot is NOT an incremental cash flow because it is not being utilized at this time.

c.

The lot is an incremental cash flow because it represents an opportunity cost.

d.

The lot is an incremental cash flow because it represents a sunk cost.

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The correct answer is: The lot is an incremental cash flow because it represents an opportunity cost.

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AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of

Select one:

a.

relevant cash flow.

b.

sunk cost.

c.

opportunity cost.

d.

incremental cash flow.

Feedback

The correct answer is: sunk cost.

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A new project would require an immediate increase in raw materials in the amount of $10,000. The firm expects that accounts payable will automatically increase $7,500. How much must the firm expect its net working capital to change if they accept this project?

Select one:

a.

+$2,500

b.

+$17,500

c.

-$2,500

d.

-$17,500

Feedback

The correct answer is: +$2,500

Question 5

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In capital budgeting analysis, using accelerated depreciation (as opposed to straight-line depreciation) results in

Select one:

a.

Lower net cash flows in the later years of the project.

b.

Lower total net cash flows for the project.

c.

Higher total net cash flows for the project.

d.

Higher net cash flows in the early years of the project.

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The correct answer is: Higher net cash flows in the early years of the project.

Question 6

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Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?

Select one:

a.

Taxes paid

b.

Financing costs

c.

Operating expenses of the project

d.

Initial investment

Feedback

The correct answer is: Financing costs

Question 7

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In capital budgeting analysis, using accelerated depreciation (as opposed to straight-line depreciation) results in

Select one:

a.

Higher taxes paid in the later years of the project.

b.

Higher total taxes paid, associated with the project.

c.

Lower total taxes paid, associated with the project.

d.

Higher taxes paid in the early years of the project.

Feedback

The correct answer is: Higher taxes paid in the later years of the project.

Question 8

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Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?

Select one:

a.

The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.

b.

The company owns the land of the future site of the new location.

c.

The new location is expected to take sales away from the existing location.

d.

All of these items should be included in the analysis.

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The correct answer is: The company spent $100,000 six months ago in a major advertising campaign which will help the new store become profitable sooner.

Question 9

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If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a:

Select one:

a.

complementary cost.

b.

obligated cost.

c.

sunk cost.

d.

committed cost.

Feedback

The correct answer is: sunk cost.

Question 10

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With regard to depreciation, the time value of money concept tells us that:

Select one:

a.

delaying the depreciation expense is always better.

b.

delaying the depreciation expense is sometimes better.

c.

taking the depreciation expense sooner is always better.

d.

taking the depreciation expense sooner is sometimes better.

Feedback

The correct answer is: taking the depreciation expense sooner is always better.

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 7:19 PM
State	Finished
Completed on	Sunday, December 12, 2021, 7:34 PM
Time taken	14 mins 28 secs
Points	3.00/4.00
Grade	7.50 out of 10.00 (75%)

Question 1

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of five years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, 17.49%, 12.49%, and 8.93% in years 1, 2, 3, 4, and 5 respectively). Revenue from the new game is expected to be $800,000 per year, with costs of $350,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 1 (ONLY YEAR 1!) estimated after-tax cash flow for this project be?

Select one:

a.

$425,707

b.

$450,000

c.

$297,995

d.

$322,288

Feedback

The correct answer is: $322,288

Question 2

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Your firm needs a computerized machine tool lathe that costs $75,000, requires $10,000 in installation, $10,000 in freight charges, and another $14,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category (depreciation of 33.33%, 44.45%, and 14.81% in years 1, 2, and 3 respectively). Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $10,000 at the end of year 3, what is the after-tax cash flow from selling it?

Select one:

a.

$13,000

b.

$10,888

c.

$9,112

d.

$7,000

Feedback

The correct answer is: $9,112

Question 3

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Suppose you sell a fixed asset for $80,000 when its book value is $120,000. If your company's marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Select one:

a.

$54,000

b.

$94,000

c.

$66,000

d.

$106,000

Feedback

The correct answer is: $94,000

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Your company is considering the purchase of a new machine. The original cost of the old machine was $80,000; it is now five years old, and it has a current market value of $30,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $40,000 and an annual depreciation expense of $8,000. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $90,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $15,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life (depreciation of 20% in year 1), and the cost of capital is 9 percent. Assume a 30 percent tax rate. What will the YEAR 1 (YEAR 1 ONLY!) after-tax operating cash flow for this project be?

Select one:

a.

$12,900

b.

$3,500

c.

$15,900

d.

$13,500

Feedback

The correct answer is: $13,500

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 7:34 PM
State	Finished
Completed on	Sunday, December 12, 2021, 7:41 PM
Time taken	6 mins 53 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

Question 1

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Your company has spent $100,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $15,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life (depreciation of 20% in year 1). Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 17 percent, and it expects net working capital to increase by $60,000 at the beginning of the project. What will be the after-tax operating cash flow for YEAR 1 (ONLY YEAR 1!) of this project?

Select one:

a.

$160,200

b.

$418,200

c.

-$31,800

d.

$193,200

Feedback

The correct answer is: $193,200

Question 2

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of five years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, 17.49%, 12.49%, and 8.93% in years 1, 2, 3, 4, and 5 respectively). Revenue from the new game is expected to be $800,000 per year, with costs of $350,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 2 (ONLY YEAR 2!) estimated after-tax cash flow for this project be?

Select one:

a.

$327,490

b.

$164,143

c.

$122,510

d.

$285,857

Feedback

The correct answer is: $327,490

Question 3

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of three years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, and 17.49% in years 1, 2, and 3 respectively). Revenue from the new game is expected to be $800,000 per year, with costs of $350,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 0 (ONLY YEAR 0!) estimated after-tax cash flow for this project be?

Select one:

a.

$102,288

b.

-$220,000

c.

-$520,000

d.

$230,000

Feedback

The correct answer is: -$220,000

Question 4

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Your firm needs a computerized machine tool lathe that costs $75,000, requires $10,000 in installation, $10,000 in freight charges, and another $14,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category (depreciation of 33.33%, 44.45%, and 14.81% in years 1, 2, and 3 respectively). Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $10,000 at the end of year 3, what is the after-tax cash flow from selling it?

Select one:

a.

$9,112

b.

$7,000

c.

$13,000

d.

$10,888

Feedback

The correct answer is: $9,112

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, December 12, 2021, 7:42 PM
State	Finished
Completed on	Sunday, December 12, 2021, 7:45 PM
Time taken	3 mins 31 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

Question 1

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You are evaluating a project for your company. You estimate the sales price to be $300 per unit and sales volume to be 5000 units in year 1; 6000 units in year 2; and 4000 units in year 3. The project has a three-year life. Variable costs amount to $100 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $240,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $60,000. An initial investment of $50,000 in NWC is required at the beginning of the project . The tax rate is 30 percent and the required return on the project is 13 percent. What is the after-tax operating cash flow for the project in YEAR 2 (YEAR 2 ONLY!)?

Select one:

a.

$759,000

b.

$735,000

c.

$679,000

d.

$815,000

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The correct answer is: $759,000

Question 2

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Suppose you sell a fixed asset for $80,000 when its book value is $120,000. If your company's marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Select one:

a.

$54,000

b.

$106,000

c.

$94,000

d.

$66,000

Feedback

The correct answer is: $94,000

Question 3

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of three years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, and 17.49% in years 1, 2, and 3 respectively). Revenue from the new game is expected to be $800,000 per year, with costs of $350,000 per year. The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 0 (ONLY YEAR 0!) estimated after-tax cash flow for this project be?

Select one:

a.

$102,288

b.

-$220,000

c.

-$520,000

d.

$230,000

Feedback

The correct answer is: -$220,000

Question 4

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KADS, Inc., has spent $300,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $20,000. The machine has an expected life of five years, a $60,000 estimated resale value, and falls under the MACRS seven-year class life (depreciation of 14.29%, 24.49%, 17.49%, 12.49%, and 8.93% in years 1, 2, 3, 4, and 5 respectively). Revenue from the new game is expected to be $700,000 per year, with costs of $350,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will the YEAR 4 (ONLY YEAR 4!) estimated after-tax cash flow for this project be?

Select one:

a.

$131,507

b.

$218,493

c.

$197,260

d.

$152,740

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The correct answer is: $218,493

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Which of the following statements is correct?

Select one:

a.

The weights of debt and equity should be based on market values because this is the most accurate assessment of the valuation.

b.

All of these statements are correct.

c.

An increase in the market risk premium is likely to increase the weighted average cost of capital.

d.

The weighted average cost of capital is calculated on an after-tax basis.

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The correct answer is: All of these statements are correct.

Using the pure-play approach for estimating a project’s beta, to evaluate a new project consisting of opening a new line of business delivering packages across the United States, it would be best to use

Select one:

a.

A beta obtained from regressing the past project’s returns on the market returns.

b.

An estimate of a beta of a company that specializes in delivering packages, such as Fed-Ex, adjusting properly for financial leverage.

c.

An estimate of a beta of a company that is of the same size as the size of the project.

d.

An estimate of a beta of a company that has the same degree of financial leverage as will be used for the project.

Feedback

The correct answer is: An estimate of a beta of a company that specializes in delivering packages, such as Fed-Ex, adjusting properly for financial leverage.

Company A issued all of its outstanding bonds 4 years ago, all maturing in 21 years, with the same terms. The yield to maturity on the bonds was recorded equal to 5.5% 3 years ago, 4% 2 years ago, 4.5% 1 year ago, and 6% earlier today. What pre-tax cost of debt should be used in the WACC equation?

Select one:

a.

20%

b.

5%

c.

6%

d.

5.5%

Feedback

The correct answer is: 6%

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

Select one:

a.

a weighted average of the capital components costs.

b.

a simple average of the capital components costs.

c.

a sum of the capital components costs.

d.

they apply to each asset as they are purchased with their respective forms of debt or equity.

Feedback

The correct answer is: a weighted average of the capital components costs.

Which of the statements below is correct regarding capital budgeting analysis?

Select one:

a.

Interest expense is not included in project’s projected cash flows because interest expense is not a cash flow; it is non-cash expense.

b.

An empty warehouse that is already owned by a company, and thus there is no monetary outlay to buy or rent it, must be included in project’s projected costs if the warehouse will be used for the project.

c.

All of the company’s revenues incurred during the life of the project must be included in project’s projected cash flows.

d.

Money spent on researching and developing a potential new product should be included in the project’s initial costs when it comes time to decide whether to launch the newly developed product.

Feedback

The correct answer is: An empty warehouse that is already owned by a company, and thus there is no monetary outlay to buy or rent it, must be included in project’s projected costs if the warehouse will be used for the project.

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as:

Select one:

a.

substitutionary effects.

b.

complementary effects.

c.

sunk effects.

d.

marginal effects.

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The correct answer is: complementary effects.

When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?

Select one:

a.

EBIT + Depreciation

b.

EBIT - Interest - Taxes + Depreciation

c.

EBIT - Taxes

d.

EBIT - Taxes + Depreciation

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The correct answer is: EBIT - Taxes + Depreciation

ABC Engineering is contemplating purchasing a new machine that was identified to work best with their unique production process. All of the following are examples of incremental cash flows, that should be included in the cash flow calculation, except _______________.

Select one:

a.

Developmental costs to determine which machine would best work with their unique process

b.

Increase in electric bill to run the machine

c.

Freight charged to ship the machine

d.

All of these are incremental cash flows that should be included in the cash flow calculation.

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The correct answer is: Developmental costs to determine which machine would best work with their unique process

A local bank is contemplating adding a new ATM to their lobby. They will need to add another communication line to connect the new ATM machine to the network, resulting in an additional monthly cost of $50. This is an example of:

Select one:

a.

complementary costs.

b.

none of these.

c.

sunk cost.

d.

incremental cash flow.

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The correct answer is: incremental cash flow.

When firms use multiple sources of capital, they need to calculate the appropriate discount rate for valuing their firm's cash flows as:

Select one:

a.

a simple average of the capital components costs.

b.

they apply to each asset as they are purchased with their respective forms of debt or equity.

c.

a sum of the capital components costs.

d.

a weighted average of the capital components costs.

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The correct answer is: a weighted average of the capital components costs.

Which of the following statements is correct?

Select one:

a.

The weights of debt and equity should be based on market values because this is the most accurate assessment of the valuation.

b.

The weighted average cost of capital is calculated on an after-tax basis.

c.

An increase in the market risk premium is likely to increase the weighted average cost of capital.

d.

All of these statements are correct.

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The correct answer is: All of these statements are correct.

Using the pure-play approach for estimating a project’s beta, to evaluate a new project consisting of opening a new line of business delivering packages across the United States, it would be best to use

Select one:

a.

A beta obtained from regressing the past project’s returns on the market returns.

b.

An estimate of a beta of a company that specializes in delivering packages, such as Fed-Ex, adjusting properly for financial leverage.

c.

An estimate of a beta of a company that has the same degree of financial leverage as will be used for the project.

d.

An estimate of a beta of a company that is of the same size as the size of the project.

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The correct answer is: An estimate of a beta of a company that specializes in delivering packages, such as Fed-Ex, adjusting properly for financial leverage.

A proxy beta is:

Select one:

a.

the average beta of firms that are only engaged in the proposed new line of business.

b.

the industry average beta that is used in lieu of the firm's beta because the firm has not existed long enough to have a beta calculated.

c.

the beta used when the firm has a great deal of business risk.

d.

None of these answers is correct.

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The correct answer is: the average beta of firms that are only engaged in the proposed new line of business.

Which of the statements below is correct?

Select one:

a.

In theory (assuming no estimation errors), using divisional WACC does not eliminate the possibility of incorrectly accepting or rejecting a project.

b.

Using firm WACC for all projects leads to incorrect rejection of low risk projects and thus to an increase in the overall company risk.

c.

All of the statements are correct.

d.

Using firm WACC for all projects leads to incorrect acceptance of high risk projects and thus to an increase in the overall company risk.

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The correct answer is: All of the statements are correct.

Which of the following statements is correct?

Select one:

a.

None of these statements is correct.

b.

An example of an increase in a net working capital is to buy more machines or another plant.

c.

A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.

d.

A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things.

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The correct answer is: A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.

A decrease in net working capital (NWC) is treated as a _________ in capital budgeting.

Select one:

a.

historical cost

b.

cash inflow

c.

cash outflow

d.

sunk cost

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The correct answer is: cash inflow

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $75,000, to be used for 3 years. The truck will be depreciated over 10 years using straight-line depreciation, but it will be sold after three years for $10,000. Use of the truck will require an increase in NWC (spare parts inventory) of $4,000. The truck will have no effect on revenues, but it is expected to save the firm $30,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 30 percent. What will the after-tax operating cash flow for this project be in its final third year (YEAR 3 ONLY! - make sure you include all relevant cash flows from year 3)?

Select one:

a.

$60,500

b.

$46,000

c.

$50,000

d.

$23,250

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The correct answer is: $50,000

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of ___________. 

Select one:

a.

Sunk cost

b.

Complementary effect

c.

Opportunity effect

d.

Substitutionary effect

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The correct answer is: Complementary effect

Which of the following statements is true regarding the calculation of component costs for the WACC formula?

Select one:

a.

Preferred stock represents a special case of the constant growth model, wherein the g equals zero.

b.

Preferred stock cannot use the constant growth model.

c.

Common stock and preferred stock are treated the same when using the constant growth model.

d.

Common stock represents a special case of the constant growth model, wherein the g equals zero.

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The correct answer is: Preferred stock represents a special case of the constant growth model, wherein the g equals zero.