FIN 500 / 331 EXAM : 26 M/C QUESTIONS OF DIFFICULT LEVEL .

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1.  Susmel Inc. is considering a project that has the following cash flow data.  What is the project’s payback?

Year 0 1 2 3
Cash Flows -$500 $150 $200 $300

 

  a. 2.03 years
  b. 2.25 years
  c. 2.50 years
  d. 2.75 years
  e. 3.03 years

 

 

2.  As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data.  What is the Year 1 cash flow?

Sales Revenues $13,000
Depreciation $4,000
Other operating costs $6,000
Tax rate 35.0%

 

  a. $5,950
  b. $6,099
  c. $6,251
  d. $6,407
  e. $6,568

 

 

3.  Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?

  a. $2.20
  b. $2.44
  c. $2.69
  d. $2.96
  e. $3.25

 

 

4.  If a typical company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

 

  a. become riskier over time, but its intrinsic value will be maximized
  b. become less risky over time, and this will maximize its intrinsic value
  c. accept too many low-risk projects and too few high-risk projects
  d. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized
  e. continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital

 

5.  Qualcomm Inc.’s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock’s expected price 5 years from now?

  a. $40.17
  b. $41.20
  c. $42.26
  d. $43.34
  e. $44.46

 

6.  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?

  a. $14.52
  b. $14.89
  c. $15.26
  d. $15.64
  e. $16.03

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7.  Masulis Inc. is considering a project that has the following cash flow and WACC data.  What is the project’s discounted payback?

WACC: 10.00%          
Year 0 1 2 3 4
Cash Flows -$950 $525 $485 $445 $405

 

  a. 1.61 years
  b. 1.79 years
  c. 1.99 years
  d. 2.22 years
  e. 2.44 years

 

8.  Bilulu Inc. is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone?  Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.

WACC: 8.75%          
Year 0 1 2 3 4
CFS -$1,100 $375 $375 $375 $375
CFL -$2,200 $725 $725 $725 $725

 

  a. $32.12
  b. $35.33
  c. $38.87
  d. $40.15
  e. $42.16

 

9.  Assume that Kish Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?

  a. 9.29%
  b. 9.68%
  c. 10.08%
  d. 10.50%
  e. 10.92%

 

10.  Several years ago the Metalusa Inc. sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?

  a. 4.28%
  b. 4.46%
  c. 4.65%
  d. 4.83%
  e. 5.03%

11.  Data Computer Systems is considering a project that has the following cash flow data.  What is the project’s IRR?  Note that a project’s IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year 0 1 2 3
Cash Flows -$1,100 $450 $470 $490

 

 

  a. 9.70%
  b. 10.78%
  c. 11.98%
  d. 13.31%
  e. 14.64%

 

 

 

 

 

 

 

 

 

 

12.  Desai Industries is analyzing an average-risk project, and the following data have been developed.  Unit sales will be constant, but the sales price should increase with inflation.  Fixed costs will also be constant, but variable costs should rise with inflation.  The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value.  This is just one of many projects for the firm, so any losses can be used to offset gains on other firm projects.  What is the project’s expected NPV?

 

WACC 10.0%
Net investment cost (depreciable basis) $200,000
Units sold 50,000
Average price per unit, Year 1 $25.00
Fixed op. cost excl. deprec. (constant) $150,000
Variable op. cost/unit, Year 1 $20.20
Annual depreciation rate 33.333%
Expected inflation rate per year 5.00%
Tax rate 40.0%

 

  a. $15,925
  b. $16,764
  c. $17,646
  d. $18,528
  e. $19,455

 

13.  If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock’s expected total return for the coming year?

  a. 8.37%
  b. 8.59%
  c. 8.81%
  d. 9.03%
  e. 9.27%

 

 

 

 

 

14.  If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a.   The expected return on the stock is 5% a year.
b.   The stock’s dividend yield is 5%.
c.    The price of the stock is expected to decline in the future.
d.   The stock’s required return must be equal to or less than 5%.
e.   The stock’s price one year from now is expected to be 5% above the current price.

 

  a. The expected return on the stock is 5% a year
  b. The stock’s dividend yield is 5%
  c. The price of the stock is expected to decline in the future
  d. The stock’s required return must be equal to or less than 5%
  e. The stock’s price one year from now is expected to be 5% above the current price

 

 

15.  Mushali Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

  a. $5,558
  b. $5,850
  c. $6,143
  d. $6,450
  e. $6,772

 

 

 

 

 

 

 

16.   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?

 

  a. 6.50%
  b. 6.83%
  c. 7.17%
  d. 7.52%
  e. 7.90%

 

 

17.  Hindelang Inc. is considering a project that has the following cash flow and WACC data.  What is the project’s MIRR?  Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.

 

WACC 12.25%          
Year   0 1 2 3 4
Cash Flows   -$850 $300 $320 $340 $360

 

 

  a. 13.42%
  b. 14.91%
  c. 16.56%
  d. 18.22%
  e. 20.04%

18.  Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. 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 common from retained earnings?

  a. 10.69%
  b. 11.25%
  c. 11.84%
  d. 12.43%
  e. 1305%

 

19.  Lafarge Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%.  Which of the following projects (A, B, and C) should the company accept?

 

a.   Project B, which is of below-average risk and has a return of 8.5%.
b.   Project C, which is of above-average risk and has a return of 11%.
c.    Project A, which is of average risk and has a return of 9%.
d.   None of the projects should be accepted.
e.   All of the projects should be accepted.

 

  a. Project B, which is of below-average risk and has a return of 8.5%
  b. Project C, which is of above-average risk and has a return of 11%.
  c. Project A, which is of average risk and has a return of 9%
  d. None of the projects should be accepted
  e. All of the projects should be accepted

 

20.  You work for Pitloa Inc., which is considering a new project whose data are shown below.  What is the project’s Year 1 cash flow?

 

Sales Revenues $62,500
Depreciation $8,000
Other operating costs $25,000
Interest Expense $8,000
Tax rate 35.0%

 

  a. $25,816
  b. $27,175
  c. $28,534
  d. $29,960
  e. $31,458

 

 

 

 

 

 

 

21.  Your company, CSUS Inc., is considering a new project whose data are shown below.  The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project’s 10-year expected operating life.  What is the project’s Year 4 cash flow?

 

Equipment cost (depreciable basis) $70,000
Sales revenues, each year $42,500
Operating costs (excl. deprec.) $25,000
Tax rate 35.0%

 

  a. $11,814
  b. $12,436
  c. $13,090
  d. $13,745
  e. $14,432

 

 

22.  Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?

  a. 8.03%
  b. 8.24%
  c. 8.45%
  d. 8.67%
  e. 8.89%

 

 

 

 

 

 

 

 

 

 

 

23.  Tesar Chemicals is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV.  If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV?  Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

 

WACC: 7.5%          
Year 0 1 2 3 4
CFS $1,100 $550 $600 $100 $100
CFL $2,700 $7650 $725 $800 $1,400

 

 

  a. $138.10
  b. $149.21
  c. $160.31
  d. $171.42
  e. $182.52

 

 

24.  As a member of UA Corporation’s financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data.  What is the Year 1 cash flow?

Sales Revenues $42,500
Depreciation $10,000
Other operating costs $17,000
Interest Expense $4,000
Tax rate 35.0%

 

 

  a. $16,351
  b. $17,212
  c. $18,118
  d. $19,071
  e. $20,075

 

 

 

25.  Clemson Software is considering a new project whose data are shown below.  The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years.  Revenues and other operating costs are expected to be constant over the project’s 3-year life.  What is the project’s Year 1 cash flow?

 

Equipment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 35.0%

 

  a. $28,115
  b. $28,836
  c. $29,575
  d. $30,333
  e. $31,092

 

 

 

26.  Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm’s required return (rs) is 11%, what is its current stock price?

  a. $30.57
  b. $31.52
  c. $32.49
  d. $33.50
  e. $34.50

 

 

 

 

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