# Fin315 Final Exam

August 5, 2019
###### Allen
August 5, 2019

Question 1

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, \$1,000 par value, 8 percent bond for \$1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of \$50.
Common Stock: A firm’s common stock is currently selling for \$75 per share. The dividend expected to be paid at the end of the coming year is \$5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was \$3.10. It is expected that to sell, a new common stock issue must be underpriced \$2 per share and the firm must pay \$1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

The firm’s cost of a new issue of common stock is ________. (See Table 9.2)

 [removed] 10.2 percent [removed] 14.3 percent [removed] 16.7 percent [removed] 17.0 percent

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, \$1,000 par value, 8 percent bond for \$1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of \$50.
Common Stock: A firm’s common stock is currently selling for \$75 per share. The dividend expected to be paid at the end of the coming year is \$5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was \$3.10. It is expected that to sell, a new common stock issue must be underpriced \$2 per share and the firm must pay \$1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

The firm’s before-tax cost of debt is ________. (See Table 9.2)

 [removed] 7.7 percent [removed] 10.6 percent [removed] 11.2 percent [removed] 12.7 percent

Table 10.4

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:

The new financial analyst does not like the payback approach (Table 10.4) and determines that the firm’s required rate of return is 15 percent. His recommendation would be to

 [removed] accept projects A and B. [removed] accept project A and reject B. [removed] reject project A and accept B. [removed] reject both.

What is the payback period for Tangshan Mining company’s new project if its initial after tax cost is \$5,000,000 and it is expected to provide after-tax operating cash inflows of \$1,800,000 in year 1, \$1,900,000 in year 2, \$700,000 in year 3 and \$1,800,000 in year 4?

 [removed] 4.33 years [removed] 3.33 years [removed] 2.33 years [removed] None of these

Should Tangshan Mining company accept a new project if its maximum payback is 3.25 years and its initial after tax cost is \$5,000,000 and it is expected to provide after-tax operating cash inflows of \$1,800,000 in year 1, \$1,900,000 in year 2, \$700,000 in year 3 and \$1,800,000 in year 4?

 [removed] Yes. [removed] No. [removed] It depends. [removed] None of these

Which capital budgeting method is most useful for evaluating the following project? The project has an initial after tax cost of \$5,000,000 and it is expected to provide after-tax operating cash flows of \$1,800,000 in year 1, -\$2,900,000 in year 2, \$2,700,000 in year 3 and \$2,300,000 in year 4?

 [removed] NPV [removed] IRR [removed] Payback [removed] Two of these

A firm has common stock with a market price of \$100 per share and an expected dividend of \$5.61 per share at the end of the coming year. A new issue of stock is expected to be sold for \$98, with \$2 per share representing the underpricing necessary in the competitive capital market. Flotation costs are expected to total \$1 per share. The dividends paid on the outstanding stock over the past five years are as follows:

The cost of this new issue of common stock is

 [removed] 5.8 percent. [removed] 7.7 percent. [removed] 10.8 percent. [removed] 12.8 percent.

Evaluate the following projects using the payback method assuming a rule of 3 years for payback.

 [removed] Project A can be accepted because the payback period is 2.5 years but Project B cannot be accepted because its payback period is longer than 3 years. [removed] Project B should be accepted because even thought the payback period is 2.5 years for project A and 3.001 project B, there is a \$1,000,000 payoff in the 4th year in Project B. [removed] Project B should be accepted because you get more money paid back in the long run. [removed] Both projects can be accepted because the payback is less than 3 years.

### Question 9

Which of the following capital budgeting techniques ignores the time value of money?

 [removed] Payback [removed] Net present value [removed] Internal rate of return [removed] Two of these

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, \$1,000 par value, 8 percent bond for \$1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of \$50.
Common Stock: A firm’s common stock is currently selling for \$75 per share. The dividend expected to be paid at the end of the coming year is \$5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was \$3.10. It is expected that to sell, a new common stock issue must be underpriced \$2 per share and the firm must pay \$1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

Assuming the firm plans to pay out all of its earnings as dividends, the weighted average cost of capital is ________. (See Table 9.2)

 [removed] 9.6 percent [removed] 10.9 percent [removed] 11.6 percent [removed] 12.1 percent

Question 11

What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is \$5,000,000 and it is expected to provide after-tax operating cash inflows of \$1,800,000 in year 1, \$1,900,000 in year 2, \$1,700,000 in year 3 and \$1,300,000 in year 4?

 [removed] \$1,700,000 [removed] \$371,764 [removed] (\$137,053) [removed] None of these

A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of \$80,000 and cash inflows at the end of each of the next five years of \$25,000. Project Z has a initial investment of \$120,000 and cash inflows at the end of each of the next four years of \$40,000. The firm should

 [removed] accept both if the cost of capital is at most 15 percent. [removed] accept only Z if the cost of capital is at most 15 percent. [removed] accept only X if the cost of capital is at most 15 percent. [removed] None of these

Question 13

When the net present value is negative, the internal rate of return is ________ the cost of capital.

 [removed] greater than [removed] greater than or equal to [removed] less than [removed] equal to

There is sometimes a ranking problem among NPV and IRR when selecting among mutually exclusive investments. This ranking problem only occurs when

 [removed] the NPV is greater than the crossover point. [removed] the NPV is less than the crossover point. [removed] the cost of capital is to the right of the crossover point. [removed] the cost of capital is to the left of the crossover point.

Consider the following projects, X and Y where the firm can only choose one. Project X costs \$600 and has cash flows of \$400 in each of the next 2 years. Project B also costs \$600, and generates cash flows of \$500 and \$275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?

 [removed] Project X [removed] Project Y [removed] Neither [removed] Not enough information to tell

What is the IRR for the following project if its initial after tax cost is \$5,000,000 and it is expected to provide after-tax operating cash inflows of \$1,800,000 in year 1, \$1,900,000 in year 2, \$1,700,000 in year 3 and \$1,300,000 in year 4?

 [removed] 15.57% [removed] 0.00% [removed] 13.57% [removed] None of these

able 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, \$1,000 par value, 7 percent bond for \$960. A flotation cost of
2 percent of the face value would be required in addition to the discount of \$40.
Preferred Stock: The firm has determined it can issue preferred stock at \$75 per share par value. The stock will pay a \$10 annual dividend. The cost of issuing and selling the stock is \$3 per share.
Common Stock: A firm’s common stock is currently selling for \$18 per share. The dividend expected to be paid at the end of the coming year is \$1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was \$1.50. It is expected that to sell, a new common stock issue must be underpriced \$1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.

The weighted average cost of capital up to the point when retained earnings are exhausted is ________. (See Table 9.1)

 [removed] 7.5 percent [removed] 8.65 percent [removed] 10.4 percent [removed] 11.0 percent

When evaluating projects using internal rate of return,

 [removed] projects having lower early-year cash flows tend to be preferred at higher discount rates. [removed] projects having higher early-year cash flows tend to be preferred at higher discount rates. [removed] projects having higher early-year cash flows tend to be preferred at lower discount rates. [removed] the discount rate and magnitude of cash flows do not affect internal rate of return.

Table 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, \$1,000 par value, 7 percent bond for \$960. A flotation cost of
2 percent of the face value would be required in addition to the discount of \$40.
Preferred Stock: The firm has determined it can issue preferred stock at \$75 per share par value. The stock will pay a \$10 annual dividend. The cost of issuing and selling the stock is \$3 per share.
Common Stock: A firm’s common stock is currently selling for \$18 per share. The dividend expected to be paid at the end of the coming year is \$1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was \$1.50. It is expected that to sell, a new common stock issue must be underpriced \$1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.

The firm’s before-tax cost of debt is ________. (See Table 9.1)

 [removed] 7.7 percent [removed] 10.6 percent [removed] 11.2 percent [removed] 12.7 percent

able 9.1

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 12-year, \$1,000 par value, 7 percent bond for \$960. A flotation cost of
2 percent of the face value would be required in addition to the discount of \$40.
Preferred Stock: The firm has determined it can issue preferred stock at \$75 per share par value. The stock will pay a \$10 annual dividend. The cost of issuing and selling the stock is \$3 per share.
Common Stock: A firm’s common stock is currently selling for \$18 per share. The dividend expected to be paid at the end of the coming year is \$1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was \$1.50. It is expected that to sell, a new common stock issue must be underpriced \$1 per share in floatation costs. Additionally, the firm’s marginal tax rate is 40 percent.

The firm’s cost of retained earnings is ________. (See Table 9.1)