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Final Exam

Started: Oct 4 at 1:46pm

Quiz Instructions

Complete the Final Exam by Sunday at 11:59 p.m. Eastern time. This is a timed exam with a 2-hour limit for completion.

Note: this is a timed quiz. You may check the remaining time you have at any point while taking the quiz by pressing the keyboard combination SHIFT, ALT, and T... Again: SHIFT, ALT, and T...

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2019-10-04T13:46:27-04:002019-10-04T13:46:27-04:002019-10-04T15:46:27-04:002019-10-06T23:59:59-04:001207199

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Question 1 0.75 pts

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0multiple_choice_question 84238

You work for the CEO of a new company that plans to manufacture and sell a new type of laptop computer. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $600,000. Other data for the firm are shown below. How much higher or lower will the firm's expected EPS be if it uses some debt rather than only equity, i.e., what is EPSL - EPSU? 0% Debt, U 60% Debt, L Oper. income (EBIT) $600,000 $600,000 Required investment $2,500,000 $2,500,000 % Debt 0.0% 60.0% $ of Debt $0.00 $1,500,000 $ of Common equity $2,500,000 $1,000,000 Shares issued, $10/share 250,000 100,000 Interest rate NA 10.00% Tax rate 35% 35%

Group of answer choices

$1.11

$1.50

$1.37

$1.23

$1.00

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Question 2 0.75 pts

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0multiple_choice_question 84209

Rivoli Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Group of answer choices

12.43%

13.05%

11.84%

10.69%

11.25%

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Question 3 0.75 pts

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0multiple_choice_question 84227

Whited Products recently completed a 4-for-1 stock split. Prior to the split, its stock sold for $120 per share. If the firm's total market value increased by 5% as a result of increased liquidity and favorable signaling effects, what was the stock price following the split?

Group of answer choices

$31.50

$33.08

$29.93

$36.47

$34.73

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Question 4 0.75 pts

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0multiple_choice_question 84194

If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?

Group of answer choices

7.52%

6.50%

7.90%

6.83%

7.17%

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Question 5 0.75 pts

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0multiple_choice_question 84206

Pavlin Corp.'s projected capital budget is $2,000,000, its target capital structure is 40% debt and 60% equity, and its forecasted net income is $900,000. If the company follows the residual dividend model, how much dividends will it pay or, alternatively, how much new stock must it issue?

Group of answer choices

$487,350; $257,213

$513,000; $270,750

$540,000; $285,000

$ 0; $300,000

$462,983; $244,352

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Question 6 0.75 pts

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0multiple_choice_question 84199

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the depreciation rates below. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? Year Depreciation Rate 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06

Group of answer choices

$ 8,878

$ 9,345

$10,355

$10,900

$ 9,837

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Question 7 0.75 pts

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0multiple_choice_question 84197

LA Moving Company has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be? Capital budget $5,000 % Debt 45% Net income (NI) $7,000

Group of answer choices

60.71%

70.13%

63.75%

77.14%

84.85%

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Question 8 0.75 pts

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0multiple_choice_question

Sorenson Corp.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ?

Group of answer choices

$45.61

$41.37

$39.40

$37.52

$43.44

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Question 9 0.75 pts

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0multiple_choice_question 84198

Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected. Old WACC: 8.00% New WACC: 11.25% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410

Group of answer choices

-$50.61

-$53.27

-$48.08

-$59.03

-$56.08

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Question 10 0.75 pts

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0multiple_choice_question 84201

Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 1 2 3 4 5 Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100

Group of answer choices

3.10%

2.08%

2.82%

2.57%

2.31%

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Question 11 0.75 pts

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0multiple_choice_question 84210

Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm's total corporate value, in millions? Year 1 2 3 FCF -$15.0 $10.0 $40.0

Group of answer choices

$386.13

$366.82

$348.48

$331.06

$314.51

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Question 12 0.75 pts

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0multiple_choice_question 84180

As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 20.0% debt would cause the cost of equity to increase from 10.0% to 12.0%, and the interest rate on the new debt would be 8.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Oper. income (EBIT) $800 Tax rate 40.0% New cost of equity (rs) 12.00% New wd 20.0% Interest rate (rd) 8.00%

Group of answer choices

$4,091

$2,982

$3,314

$4,545

$3,682

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Question 13 0.75 pts

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0multiple_choice_question 84214

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Group of answer choices

$15.64

$14.89

$14.52

$16.03

$15.26

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Question 14 0.75 pts

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0multiple_choice_question 84230

You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd) to only 10%. Other things held constant, and based on the data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROENew - ROEOld? Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 13.00% Higher interest rate 13% Tax rate 35% Lower wd 10% Lower interest rate 9%

Group of answer choices

5.44%

6.03%

6.33%

6.65%

5.73%

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Question 15 0.75 pts

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0multiple_choice_question 84226

Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?

Group of answer choices

15.48%

12.70%

14.04%

13.37%

14.74%

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Question 16 0.75 pts

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0multiple_choice_question 84177

A. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of equity from retained earnings?

Group of answer choices

14.17%

14.74%

13.63%

13.10%

12.60%

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Question 17 0.75 pts

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0multiple_choice_question 84223

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? Risk-adjusted WACC 10.0% Net investment cost (depreciable basis) $65,000 Straight-line depreciation rate 33.3333% Sales revenues, each year $65,500 Annual operating costs (excl. depreciation) $25,000 Tax rate 35.0%

Group of answer choices

$15,740

$17,441

$19,325

$16,569

$18,359

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Question 18 0.75 pts

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0multiple_choice_question 84228

Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman family members would like more dividends, and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased, holding other things constant? Original capital budget $3,000,000 New capital budget $2,000,000 Net income $3,500,000 % Debt 40%

Group of answer choices

$486,000

$660,000

$726,000

$600,000

$540,000

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Question 19 0.75 pts

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0multiple_choice_question 84195

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

Group of answer choices

8.10

7.35

7.00

6.98

7.72

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Question 20 0.75 pts

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0multiple_choice_question 84202

Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,900 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years. Each project has a WACC of 8%. Using the replacement chain approach, what is the NPV of the most profitable project?

Group of answer choices

$4,286

$4,325

$4,242

$4,246

$4,433

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