Exam Iii
Fin 221 Spring 2011 Exam 3
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. MAD Inc. is evaluating the following four independent, investment opportunities: Project A B C D Cost $300,000 150,000 200,000 400,000 IRR 14% 10% 13% 11%
MAD’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company’s new debt will be 10 percent. MAD’s beta is 1.7, the risk free rate is 4% and the required market return is 12%. If the company’s tax rate is 30 percent, then which of the projects will be accepted? A) Projects A, B, C, and D B) Projects A, C, and D C) Project A D) Projects A and C 2. Which of the following will decrease the WACC of any given firm that earns taxable profit? A) An increase in the Beta of the common stock B) Issuing new equity instead of using retaining earnings for common equity financing. C) An increase in the Preferred Stock’s required return D) An increase in the expected dividend growth rate of the common stock, holding D1 (the dividend paid one period from now) constant. E) An increase in the firm’s marginal tax rate 3. Wooldridge furniture is replacing its old machine with a more efficient one. The old machine is being depreciated on a straight-line basis at a rate of $10,000 per year. The old machine has a current book value of $100,000 and a 10-year remaining useful and depreciation life. The new machine, which costs $910,000, will be depreciated for 10 years using simplified straight-line depreciation to zero. Introducing the more efficient machine is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the year 2 cash flow for this project. Assume Wooldridge has a marginal tax rate of 40%. A) $110,400 B) $49,520 C) $34,520 D) $122,250 4. Dumb & Dumber Development Company has two mutually exclusive investment projects to evaluate. Assume both projects can be repeated indefinitely. The following cash
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. MAD Inc. is evaluating the following four independent, investment opportunities: Project A B C D Cost $300,000 150,000 200,000 400,000 IRR 14% 10% 13% 11%
MAD’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company’s new debt will be 10 percent. MAD’s beta is 1.7, the risk free rate is 4% and the required market return is 12%. If the company’s tax rate is 30 percent, then which of the projects will be accepted? A) Projects A, B, C, and D B) Projects A, C, and D C) Project A D) Projects A and C 2. Which of the following will decrease the WACC of any given firm that earns taxable profit? A) An increase in the Beta of the common stock B) Issuing new equity instead of using retaining earnings for common equity financing. C) An increase in the Preferred Stock’s required return D) An increase in the expected dividend growth rate of the common stock, holding D1 (the dividend paid one period from now) constant. E) An increase in the firm’s marginal tax rate 3. Wooldridge furniture is replacing its old machine with a more efficient one. The old machine is being depreciated on a straight-line basis at a rate of $10,000 per year. The old machine has a current book value of $100,000 and a 10-year remaining useful and depreciation life. The new machine, which costs $910,000, will be depreciated for 10 years using simplified straight-line depreciation to zero. Introducing the more efficient machine is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the year 2 cash flow for this project. Assume Wooldridge has a marginal tax rate of 40%. A) $110,400 B) $49,520 C) $34,520 D) $122,250 4. Dumb & Dumber Development Company has two mutually exclusive investment projects to evaluate. Assume both projects can be repeated indefinitely. The following cash