Question 1

Your answer is correct.

Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

$150,000

$137,500

$112,500

$125,000

Question 2

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The process of identifying the bundle of projects that creates the greatest total value and allocating the available capital to the projects is known as

capital rationing.

risk analysis.

budgeting.

rationing.

Question 3

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Capital rationing. You are considering a project that has an initial cost of $1,200,000. If you take the project, it will produce net cash flows of $300,000 per year for the next six years. If the appropriate discount rate for the project is 10 percent, what is the profitability index of the project?

0.09

1.09

2.09

2.18

Question 4

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What might cause a firm to face capital rationing?

If investors require returns for their capital that are too high.

If a firm has several projects that are expected to generate negative IRR’s.

If a firm rejects some capital investments that are expected to generate positive NPV’s.

If a firm has more than one project with a positive NPV.

Question 5

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How firms estimate their cost of capital: The WACC for a firm is 19.75 percent. You know that the firm is financed with $75 million of equity and $25 million of debt. The cost of debt capital is 7 percent. What is the cost of equity for the firm?

19.75%

32.50%

58.00%

24.00%

Question 6

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The cost of debt: Bellamee, Inc., has semiannual bonds outstanding with five years to maturity and are priced at $920.87. If the bonds have a coupon rate of 7 percent, then what is the YTM for the bonds?

9.2%

4.5%

7.0%

9.0%

Question 7

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The cost of debt: Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%? Assume that your calculation is made as on Wall Street.

12.500%

12.890%

8.125%

6.250%

Question 8

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The cost of equity: Radical VenOil, Inc., has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, then what is the firm’s beta if the firm’s marginal tax rate is 35 percent?

1.28

1.60

1.0

4.10

Question 9

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Which type of project do financial managers typically use the highest cost of capital when evaluating?

New product projects

Market expansion projects

Efficiency projects

Extension projects