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finance questions (please read before contacting me)
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<html xmlns="http://www.w3.org/1999/xhtml" lang="en"> <body class="calibre"> <p class="block_">QUESTION 1</p> <ol class="list_"> <li class="block_1">Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project"s NPV? Note that if a project"s projected NPV is negative, it should be rejected.</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">11.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$1,000</p></td> <td class="td_"><p class="block_3">$350</p></td> <td class="td_"><p class="block_3">$350</p></td> <td class="td_"><p class="block_3">$350</p></td> <td class="td_"><p class="block_3">$350</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$77.49</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$81.56</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$85.86</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$90.15</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$94.66</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 2</p> <ol class="list_"> <li class="block_1">Harry"s Inc. is considering a project that has the following cash flow and WACC data. What is the project"s NPV? Note that if a project"s projected NPV is negative, it should be rejected.</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">10.25%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> <td class="td_1"><p class="block_3">5</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$1,000</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$300</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_4"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$105.89</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$111.47</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$117.33</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$123.51</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$130.01</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 3</p> <ol class="list_"> <li class="block_1">Warr Company 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 or negative, in both cases it will be rejected.</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$1,050</p></td> <td class="td_"><p class="block_3">$400</p></td> <td class="td_"><p class="block_3">$400</p></td> <td class="td_"><p class="block_3">$400</p></td> <td class="td_"><p class="block_3">$400</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">14.05%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">15.61%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">17.34%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">19.27%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">21.20%</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 4</p> <ol class="list_"> <li class="block_1">Mansi Inc. is considering a project that has the following cash flow data. What is the project"s payback?</li> </ol> <table class="table_1"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$750</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$325</p></td> <td class="td_"><p class="block_3">$350</p></td> </tr> <tr class="tr_"> <td class="td_6" colspan="3"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">1.91 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.12 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.36 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.59 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.85 years</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 5</p> <ol class="list_"> <li class="block_1">Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project"s NPV? Note that a project"s projected NPV can be negative, in which case it will be rejected.</li> </ol> <table class="table_1"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">10.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$950</p></td> <td class="td_"><p class="block_3">$500</p></td> <td class="td_"><p class="block_3">$400</p></td> <td class="td_"><p class="block_3">$300</p></td> </tr> <tr class="tr_"> <td class="td_6" colspan="3"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$54.62</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$57.49</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$60.52</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$63.54</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$66.72</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 6</p> <ol class="list_"> <li class="block_1">Barry Company is considering a project that has the following cash flow and WACC data. What is the project"s NPV? Note that a project"s projected NPV can be negative, in which case it will be rejected.</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">12.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> <td class="td_1"><p class="block_3">5</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$1,100</p></td> <td class="td_"><p class="block_3">$400</p></td> <td class="td_"><p class="block_3">$390</p></td> <td class="td_"><p class="block_3">$380</p></td> <td class="td_"><p class="block_3">$370</p></td> <td class="td_"><p class="block_3">$360</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_4"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> <td class="td_5"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$250.15</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$277.94</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$305.73</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$336.31</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$369.94</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 7</p> <ol class="list_"> <li class="block_1">Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project"s MIRR? Note that a project"s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.</li> </ol> <table class="table_1"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">10.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$1,000</p></td> <td class="td_"><p class="block_3">$450</p></td> <td class="td_"><p class="block_3">$450</p></td> <td class="td_"><p class="block_3">$450</p></td> </tr> <tr class="tr_"> <td class="td_6" colspan="3"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6"> 9.32%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">10.35%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">11.50%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">12.78%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">14.20%</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 8</p> <ol class="list_"> <li class="block_1">Malholtra 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 projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">10.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$850</p></td> <td class="td_"><p class="block_3">$300</p></td> <td class="td_"><p class="block_3">$320</p></td> <td class="td_"><p class="block_3">$340</p></td> <td class="td_"><p class="block_3">$360</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">14.08%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">15.65%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">17.21%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">18.94%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">20.83%</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 9</p> <ol class="list_"> <li class="block_1">Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project"s <span class="text_1">discounted</span> payback?</li> </ol> <table class="table_1"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">10.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Cash flows</p></td> <td class="td_"><p class="block_3">−$900</p></td> <td class="td_"><p class="block_3">$500</p></td> <td class="td_"><p class="block_3">$500</p></td> <td class="td_"><p class="block_3">$500</p></td> </tr> <tr class="tr_"> <td class="td_6" colspan="3"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">1.88 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.09 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.29 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.52 years</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">2.78 years</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 10</p> <ol class="list_"> <li class="block_1">A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC:</p></td> <td class="td_"><p class="block_2">6.00%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Year</p></td> <td class="td_1"><p class="block_3">0</p></td> <td class="td_1"><p class="block_3">1</p></td> <td class="td_1"><p class="block_3">2</p></td> <td class="td_1"><p class="block_3">3</p></td> <td class="td_1"><p class="block_3">4</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">CF<sub class="text_2">S</sub></p></td> <td class="td_"><p class="block_3">−$1,025</p></td> <td class="td_"><p class="block_3">$380</p></td> <td class="td_"><p class="block_3">$380</p></td> <td class="td_"><p class="block_3">$380</p></td> <td class="td_"><p class="block_3">$380</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">CF<sub class="text_2">L</sub></p></td> <td class="td_"><p class="block_3">−$2,150</p></td> <td class="td_"><p class="block_3">$765</p></td> <td class="td_"><p class="block_3">$765</p></td> <td class="td_"><p class="block_3">$765</p></td> <td class="td_"><p class="block_3">$765</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$188.68</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$198.61</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$209.07</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$219.52</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$230.49</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 11</p> <ol class="list_"> <li class="block_1">TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and 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. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project"s NPV? (Hint: Cash flows are constant in Years 1-3.)</li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC</p></td> <td class="td_"><p class="block_8">10.0%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Pre-tax cash flow reduction for other products (cannibalization)</p></td> <td class="td_"><p class="block_8">−$5,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Investment cost (depreciable basis)</p></td> <td class="td_"><p class="block_8">$80,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Straight-line depreciation rate</p></td> <td class="td_"><p class="block_8">33.333%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Annual sales revenues</p></td> <td class="td_"><p class="block_8">$67,500</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Annual operating costs (excl. depreciation)</p></td> <td class="td_"><p class="block_8">−$25,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Tax rate</p></td> <td class="td_"><p class="block_8">35.0%</p></td> </tr> <tr class="tr_"> <td class="td_7" colspan="3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$3,636</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$3,828</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$4,019</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$4,220</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$4,431</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 12</p> <ol class="list_"> <li class="block_1">Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project"s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in net operating working capital would be required, and revenues and other operating costs would be constant over the project"s 3-year life. What is the project"s NPV? (Hint: Cash flows are constant in Years 1-3.)</li> </ol> <table class="table_1"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">WACC</p></td> <td class="td_"><p class="block_8">10.0%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Opportunity cost</p></td> <td class="td_"><p class="block_8">$100,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Net equipment cost (depreciable basis)</p></td> <td class="td_"><p class="block_8">$65,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Straight-line depreciation rate for equipment</p></td> <td class="td_"><p class="block_8">33.333%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Annual sales revenues</p></td> <td class="td_"><p class="block_8">$123,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Annual operating costs (excl. depreciation)</p></td> <td class="td_"><p class="block_8">$25,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Tax rate</p></td> <td class="td_"><p class="block_8">35%</p></td> </tr> <tr class="tr_"> <td class="td_8" colspan="3"><p class="block_4"> </p></td> <td class="td_6"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$10,521</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$11,075</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$11,658</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$12,271</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$12,885</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 13</p> <ol class="list_"> <li class="block_9">El Capitan Foods has a capital structure of 40% debt and 60% equity, its tax rate is 35%, and its beta (leveraged) is 1.25. Based on the Hamada equation, what would the firm"s beta be if it used no debt, i.e., what is its unlevered beta, b<sub class="text_2">U</sub>?</li> </ol> <table class="table_2"> <tbody class="calibre1"><tr class="calibre2"> <td class="td_9"><p class="block_5"></p></td> <td class="td_9"><p class="block_4"> </p></td> <td class="td_9"><p class="block_6">0.71</p></td> </tr> <tr class="calibre2"> <td class="td_9"><p class="block_5"></p></td> <td class="td_9"><p class="block_4"> </p></td> <td class="td_9"><p class="block_6">0.75</p></td> </tr> <tr class="calibre2"> <td class="td_9"><p class="block_5"></p></td> <td class="td_9"><p class="block_4"> </p></td> <td class="td_9"><p class="block_6">0.79</p></td> </tr> <tr class="calibre2"> <td class="td_9"><p class="block_5"></p></td> <td class="td_9"><p class="block_4"> </p></td> <td class="td_9"><p class="block_6">0.83</p></td> </tr> <tr class="calibre2"> <td class="td_9"><p class="block_5"></p></td> <td class="td_9"><p class="block_4"> </p></td> <td class="td_9"><p class="block_6">0.87</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 14</p> <ol class="list_"> <li class="block_10"><span class="text_3">You plan to invest in one of two home delivery pizza companies, High and Low, that were recently founded and are about to commence operations. They are identical except for their use of debt (w</span><sub class="text_4">d</sub><span class="text_3">) and the interest rates on their debt</span><span class="text_5">⎯</span><span class="text_3">High uses more debt and thus must pay a higher interest rate. Based on the data given below, how much higher or lower will High"s expected EPS be versus that of Low, i.e., what is EPS</span><sub class="text_4">High</sub><span class="text_3"> − EPS</span><sub class="text_4">Low</sub><span class="text_3">?</span></li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="4"><p class="block_11">Applicable to Both Firms</p></td> <td class="td_" colspan="2"><p class="block_11">Firm High"s Data</p></td> <td class="td_" colspan="2"><p class="block_11">Firm Low"s Data</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Capital</p></td> <td class="td_"><p class="block_8">$3,000,000</p></td> <td class="td_"><p class="block_2">w<sub class="text_2">d</sub></p></td> <td class="td_"><p class="block_8">70%</p></td> <td class="td_"><p class="block_2">w<sub class="text_2">d</sub></p></td> <td class="td_"><p class="block_8">20%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">EBIT</p></td> <td class="td_"><p class="block_8">$500,000</p></td> <td class="td_"><p class="block_2">Shares</p></td> <td class="td_"><p class="block_8">90,000</p></td> <td class="td_"><p class="block_2">Shares</p></td> <td class="td_"><p class="block_8">240,000</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Tax rate</p></td> <td class="td_"><p class="block_8">35%</p></td> <td class="td_"><p class="block_2">Int. rate</p></td> <td class="td_"><p class="block_8">12%</p></td> <td class="td_"><p class="block_2">Int. rate</p></td> <td class="td_"><p class="block_8">10%</p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$0.49</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$0.54</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$0.60</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$0.66</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">$0.73</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 15</p> <ol class="list_"> <li class="block_10"><span class="text_3">Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms" operations are identical</span><span class="text_5">⎯</span><span class="text_3">they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (w</span><sub class="text_4">d</sub><span class="text_3">). Based on the following data, how much higher or lower is A"s ROE than that of NA, i.e., what is ROE</span><sub class="text_4">A</sub><span class="text_3"> − ROE</span><sub class="text_4">NA</sub><span class="text_3">?</span></li> </ol> <table class="table_"> <tbody class="calibre1"><tr class="tr_"> <td class="td_" colspan="4"><p class="block_11">Applicable to Both Firms</p></td> <td class="td_" colspan="2"><p class="block_11">Firm A"s Data</p></td> <td class="td_" colspan="2"><p class="block_11">Firm NA"s Data</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Capital</p></td> <td class="td_"><p class="block_8">$150,000</p></td> <td class="td_"><p class="block_2">w<sub class="text_2">d</sub></p></td> <td class="td_"><p class="block_8">50%</p></td> <td class="td_"><p class="block_2">w<sub class="text_2">d</sub></p></td> <td class="td_"><p class="block_8">0%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">EBIT</p></td> <td class="td_"><p class="block_8">$40,000</p></td> <td class="td_"><p class="block_2">Int. rate</p></td> <td class="td_"><p class="block_8">12%</p></td> <td class="td_"><p class="block_2">Int. rate</p></td> <td class="td_"><p class="block_8">10%</p></td> </tr> <tr class="tr_"> <td class="td_" colspan="3"><p class="block_2">Tax rate</p></td> <td class="td_"><p class="block_8">35%</p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> <td class="td_"><p class="block_2"> </p></td> </tr> <tr class="tr_"> <td class="td_2" colspan="3"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_2"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> <td class="td_3"><p class="block_4"> </p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6"> 8.60%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6"> 9.06%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6"> 9.53%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">10.01%</p></td> </tr> <tr class="calibre2"> <td class="td_" colspan="2"><p class="block_5"></p></td> <td class="td_"><p class="block_4"> </p></td> <td class="td_"><p class="block_6">10.51%</p></td> </tr> </tbody></table> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 16</p> <ol class="list_"> <li class="block_1">If a firm borrows money, it is using financial leverage.</li> </ol> <p class="block_12"> True</p> <p class="block_13"> False</p> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 17</p> <ol class="list_"> <li class="block_1">Other things held constant, an increase in financial leverage will increase a firm"s market (or systematic) risk as measured by its beta coefficient.</li> </ol> <p class="block_12"> True</p> <p class="block_13"> False</p> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 18</p> <ol class="list_"> <li class="block_1">The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.</li> </ol> <p class="block_12"> True</p> <p class="block_13"> False</p> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 19</p> <ol class="list_"> <li class="block_1">Provided a firm does not use an extreme amount of debt, operating leverage typically affects only EPS, while financial leverage affects both EPS and EBIT.</li> </ol> <p class="block_12"> True</p> <p class="block_13"> False</p> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_">QUESTION 20</p> <ol class="list_"> <li class="block_1">The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm"s stock price.</li> </ol> <p class="block_12"> True</p> <p class="block_13"> False</p> <p class="block_7"><span class="text_">5 points </span><b class="calibre3"> </b></p> <p class="block_14"> </p> </body></html> ">
