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1 FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2017 EXAM 3 PUT YOUR NAME, SECTION NUMBER AND TEST VERSION ON THE SANTRON FORM MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The weights used to determine the relative importance of the firmʹs sources of capital should reflect 1) A) current market values for bonds, common stock, and preferred stock and book values for retained earnings. B) subjective adjustments for firm risk. C) book values in accord with generally accepted accounting principles. D) current market values. 2) If SuperMart decides to offer a line of groceries at its discount retail outlet, inventories are expected to increase by $1,200,000, accounts receivable by $300,000 and accounts payable by $500,000. What is the cash outflow for working capital requirements? 2) A) $2,000,000 B) $1,700,000 C) $1,500,000 D) $1,000,000 3) Which of the following are typical consequences of good capital budgeting decisions? 3) A) The firm gains knowledge and experience that may be useful in future decisions. B) The firm increases in value. C) Good capital budgeting decisions help a company define its core competencies. D) All of the above. 4) Sonderson Corporation is undertaking a capital budgeting analysis. The firmʹs beta is 1.5. The rate on 10 year T Bonds is 1.6% and the return on the S&P 500 index is 8%. What is the appropriate cost of common equity in determining the firmʹs cost of capital? 4) A) 9.6% B) 12.0% C) 13.6% D) 11.2% 5) Project EH! requires an initial investment of $50,000, and has a net present value of $12,000. Project BE requires an initial investment of $100,000, and has a net present value of $13,000. The projects are mutually exclusive. The firm should accept 5) A) project BE. B) project EH!. C) both projects. D) neither project. 6) Project Sigma requires an investment of $1 million and has a NPV of $10. Project Delta requires an investment of $500,000 and has a NPV of $150,000. The projects involve unrelated new product lines. The firm can raise unlimited amounts of capital. 6) A) The company should look at other investment criteria, not just NPV. B) Both projects should be accepted because they have positive NPVʹs. C) Neither project should be accepted because they might compete with one another. D) Only project Delta should be accepted. Alphaʹs NPV is too low for the investment. 1

2 7) Which of the following is a typical capital budgeting decision? 7) A) Purchase of office supplies B) Financing the firm with more long term debt and less equity C) Granting credit to a new customer D) Replacement of manufacturing equipment with more modern and efficient equipment 8) MacHinery Manufacturing Company is considering a three year project that has a cost of $75,000. The project will generate after tax cash flows of $33,100 in Year 1, $31,500 in Year 2, and $31,200 in Year 3. Assume that the firmʹs proper rate of discount is 10% and that the firmʹs tax rate is 40%. What is the projectʹs payback? 8) A) 0.33 years B) 1.22 years C) 2.33 years D) Three years 9) Consider a project with the following cash flows: After Tax After Tax Accounting Cash Flow Year Profits from Operations 1 $799 $750 2 $150 $1,000 3 $200 $1,200 Initial outlay = $1,500 Terminal cash flow = 0 Compute the profitability index if the companyʹs discount rate is 10%. 9) A) 15.8 B) 1.61 C) 0.62 D) ) Incremental cash flows from a project = 10) A) Firm cash flows with the project minus firm cash flows without the project. B) Firm cash flows without the project plus or minus changes in revenue with the project. C) Firm cash flows with the project plus firm cash flows without the project. D) Firm cash flows without the project plus or minus changes in net income. Use the following information to answer the following question(s). A firm currently has the following capital structure which it intends to maintain. Debt: $3,000,000 par value of 9% bonds outstanding with an annual before tax yield to maturity of 7.67% on a new issue. The bonds currently sell for $115 per $100 par value. Common stock: 46,000 shares outstanding currently selling for $50 per share. The firm expects to pay a $5.50 dividend per share one year from now and is experiencing a 3.67% growth rate in dividends, which it expects to continue indefinitely. The firmʹs marginal tax rate is 40%. The company has no plans to issue new securities. 11) The firmʹs weighted average cost of capital is 11) A) 7.71%. B) 9.29%. C) 8.63%. D) 10.47%. 12) The current total value of the firm is 12) A) $4,950,000. B) $6,450,000. C) $3,250,000. D) $5,750,000. 2

3 13) The after tax cost of common stock is 13) A) 12.41%. B) 11.65%. C) 13.23%. D) 14.67%. 14) The proportion of debt in this firmʹs capital structure is 14) A) 50%. B) 70%. C) 60%. D) 40%. 15) The after tax cost of debt is 15) A) 5.40%. B) 6.20%. C) 3.80%. D) 4.60%. 16) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) 16) A) $4,568 B) $1,056 C) $6,577 D) $7,621 Use the following information to answer the following question(s). Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight line method over the projectʹs five year life to a salvage value of zero. The machineʹs purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. 17) The initial investment for this decision is 17) A) $20,000. B) $21,000. C) $23,000. D) $27, ) The machineʹs incremental after tax cash inflow for year 1 is 18) A) $8,620. B) $5,980. C) $7,980. D) $6, ) The machineʹs after tax incremental cash flow in year five is 19) A) $8,620. B) $6,980. C) $7,120. D) $5, ) Which of the following cash flows should be included as incremental costs when evaluating capital projects? 20) A) Opportunity costs that are directly related to a project B) Expenses that are incurred in order to modify a firmʹs production facility in order to invest in a project C) Investment in working capital that is directly related to a project D) All of the above 21) Which of the following would be considered a terminal cash flow of a capital budgeting project? 21) A) The expected salvage value of the asset B) Recapture of any investment in working capital that was included as an incremental cash outlay C) Any tax payments or refunds associated with the salvage value of the asset D) All of the above 3

4 22) The expected dividend is $2.50 for a share of stock priced at $25. What is the cost of common equity if the long term growth in dividends is projected to be 4%? 22) A) 10% B) 8% C) 14% D) 18% 23) Which of the following best describes a firmʹs cost of capital? 23) A) The average yield to maturity on debt B) The average cost of the firmʹs assets C) The coupon rate on preferred stock D) The rate of return that must be earned on its investments in order to satisfy the firmʹs investors 24) Thaler & Co. anticipates an increase of $1,000,000 in Net Operating Income from first year sales of a new product. Taxes will be $350,000 and the company took $150,000 in depreciation expense. Operating cash flow equals 24) A) $1,000,000. B) $650,000. C) $800,000. D) $500, ) Analysis of a machine indicates that it has a cost of $5,375,000. The machine is expected to produce cash inflows of $1,825,000 in Year 1; $1,775,000 in Year 2; $1,630,000 in Year 3; $1,585,000 in Year 4; and $1,650,000 in Year 5. What is the machineʹs IRR? 25) A) 11.11% B) 23.00% C) 12.16% D) 17.81% 4

5 1) D 2) D 3) D 4) D 5) A 6) B 7) D 8) C 9) B 10) A 11) C 12) D 13) D 14) C 15) D 16) C 17) B 18) B 19) B 20) D 21) D 22) C 23) D 24) C 25) D 5