TEST #2 – PRACTICE QUESTIONS
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1. You are considering the following two mutually exclusive projects. The required rate of return is 14.6 percent for project A and 13.8 percent for project B. Which project should you accept and why?
project A; because it has the higher required rate of return
project A; because its NPV is about $4,900 more than the NPV of project B X project B; because it has the largest total cash inflow project B; because it has the largest cash inflow in year one
project B; because it has the lower required return
2. A project has average net income of $5,900 a year over its 6-year life. The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimum average accounting return of 11.5 percent. The firm should the project because the AAR is percent.
accept; 5.71
accept; 9.90
accept; 12.04 X
reject; 5.71
reject; 12.04
3. A project has average net income of $5,900 a year over its 6-year life. The initial cost of the project is $98,000 which will be depreciated using 3.
Bleakly Enterprises has a capital structure of 40 percent common stock, 10 percent preferred stock, and 50 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost?
5.8 percent
6.2 percent
6.4 percent
6.6 percent
6.8 percent X
4. What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?
0.94
0.98
1.02 X
1.06
1.11
5. You just sold 600 shares of Wesley, Inc. stock at a price of $32.04 a share. Last year, you paid $30.92 a share