Question Completion Status: Test Information Description Exam 3 is closed book. It tests your understanding on contents in Chapter 8, 9, and 10. Exam 3 contains 30 multiple choice questions and problems. Exam 3 is available between 10:00 am 5/7 (Thursday) to 10:00 am 5/10 (Sunday). You have 90 minutes to finish it. You can do the exam twice. If you are not satisfied with the score in your first attempt, you can go over the relevant contents and do the exam a second time before it's ended. If you plan to do Exam 3 only once, you should start doing the exam no later than 7:30 am on 5/10/2015. Once the time is over, the exam will be stopped, and your results will be automatically saved and submitted. The higher score of your two attempts will be counted. No extention will be given if a student does not complete the exam during the scheduled period. Instructions Timed Test This test has a time limit of 3 hours.This test will save and submit automatically when the time expires. Warnings appear when half the time, 5 minutes, 1 minute, and 30 seconds remain. Multiple Attempts This test allows 2 attempts. This is attempt number 1. Save All Answers Save and Submit 3.33 points Question 1 Saved The appropriate cost of capital for a project depends on a. the interest rate on the firm's outstanding long­term bonds b. the risk associated with the project c. the type of assets used in the project (that is, whether they are current or fixed assets) d. the type of security issued to finance the project 3.33 points Saved Question 2 Cash flows on an alternative investment that a firm decides not to make are a(n):         

FIN36040 Exam 3

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Exams H Take Test: Exam 3

Take Test: Exam 3

Test Information

Description Exam 3 is closed book. It tests your understanding on contents in Chapter 8, 9, and 10. Exam 3

contains 30 multiple choice questions and problems. Exam 3 is available between 10:00 am 5/7

(Thursday) to 10:00 am 5/10 (Sunday). You have 90 minutes to finish it. You can do the exam twice. If

you are not satisfied with the score in your first attempt, you can go over the relevant contents and do

the exam a second time before it's ended. If you plan to do Exam 3 only once, you should start doing

the exam no later than 7:30 am on 5/10/2015. Once the time is over, the exam will be stopped, and

your results will be automatically saved and submitted. The higher score of your two attempts will be

counted. No extention will be given if a student does not complete the exam during the scheduled

period.

Instructions

Timed Test This test has a time limit of 3 hours.This test will save and submit automatically when the time expires.

Warnings appear when half the time, 5 minutes, 1 minute, and 30 seconds remain.

Multiple

Attempts

This test allows 2 attempts. This is attempt number 1.

Save All Answers Save and Submit

The appropriate cost of capital for a project depends on

a. the interest rate on the firm's outstanding longterm

bonds

b. the risk associated with the project

c. the type of assets used in the project (that is, whether they

are current or fixed assets)

d. the type of security issued to finance the project

Question 1 

Cash flows on an alternative investment that a firm decides not

to make are a(n):

Question 2 

?

Question Completion Status:

Remaining Time: 1 hour, 04

minutes, 06 seconds.

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a. opportunity cost.

b. sunk cost.

c. terminal value.

d. incremental cash flow.

Cash Flows that occur if and only if a project is accepted are:

a. terminal costs.

b. incremental cash flows.

c. current cash flows.

d. sunk costs.

Question 3 

Net working capital increases when

a. cost of goods sold falls, or interest rate rises

b. inventory increases, accounts receivable increases, or

accounts payable falls

c. inventory falls, accounts receivable falls, or accounts

payable increases

d. operating expenses fall, or current assets decrease

Question 4 

Nalcoa Corp. is financing a project that is in the same industry

as its current portfolio of projects. If Nalcoa has a beta of

1.2 and the expected market risk premium is 5% while the riskfree

rate is 4% then what is the weighted average cost of

capital for Nalcoa if it is, and plans to continue to be an all

equity financed firm?

a. there is not enough information to calculate the WACC

b. 9.5%

c. 10.0%

d. 12.0%

Question 5 

A project’s discount rate

a. must be lower than the cost of funds for the firm’s current

list of projects.

b. must be high enough to compensate investors for the project’s

risk.

c. must be less than the WACC of the the firm.

d. must be greater than the WACC of the the firm.

Question 6 

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must be greater than the WACC of the the firm.

The Commerce Company is evaluating a project with the following cash flows:

Cash Flow 0: $

10,000

Year 1: $ 4,000,

Year 2: $ 6,000

Year 3: $ 8,000

What is the net present value of the proposed Commerce Company

project if the discount rate is 9%?

a. $4,897.27

b. $5,347.52

c. $5,198.39

d. $3,357.41

Question 7 

Other things the same, if the market interest rates decrease, the IRR of a project:

a. decreases.

b. increases.

c. is unaffected.

d. cannot be determined without knowing the discount rate.

Question 8 

Alpha Car Rental purchased 6 cars for a total of $120,000 three

years ago. Now it is replacing the cars with newer vehicles. The

book value company has depreciated 93% of the old cars, and sold

these cars for a total of $ 30,000. Assume a tax rate of 40%.

What is the cash inflow from the sale of these vehicles?

a. $30,000

b. $19,672

c. $18,000

d. $21,360

Question 9 

Future Semiconductor is considering the purchase of photolithography

equipment that will cost $80,000. The equipment requires maintenance of

$6,000 at the end of each of the next four years. After four years it will

have no value at all. Assume a cost of capital of 10%. What is the present

value of the cost of the equipment?

a. $102,168

b. $99,019

Question 10 

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c. $96,761

d. $87,562

A firm has a capital structure of 40% debt and 60% equity. Debt

can be issued at a return of 9%, while the cost of equity for

the firm is 12%. What is the firm’s WACC if the tax rate facing

the firm is 30%?

a. 10.35%

b. 9.72%

c. 11.78%

d. 8.92%

Question 11 

Suppose a particular investment project will require an initial

cash outlay of $800,000 and will generate a cash inflow of

$350,000 in each of the next three years. What is the project’s

IRR? Suppose a company’s required rate of return is 10%, should

it accept the project?

a. 9.72%; accept the project

b. 13.82%; reject the project

c. 8.93%; reject the project

d. 14.93%; accept the project

Question 12 3.43 points Saved

CapCo has a capital structure that is composed of $20 million of

debt and $80 million of common equity. If CapCo is in the 35%

marginal tax rate, what is its WACC if the yield to investors on

CapCo debt is 8% and the cost of CapCo common equity is 10%?

a. 9.75%

b. 8.35%

c. 9.04%

d. 8.63%

Question 13 

Everything else being equal a lower corporate tax rate

a. will not affect the WACC of a firm with debt in its capital

structure

b. will decrease the WACC of a firm with only equity in its

capital structure

c. will increase the WACC of a firm with debt and equity in its

Question 14 

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c. will increase the WACC of a firm with debt and equity in its

capital structure

d. will decrease the WACC of a firm with some debt in its

capital structure

Gamma Electronics is considering the purchase of testing equipment that will cost $600,000 to

replace old equipment. Assume the new machine will generate after‐tax savings of $200,000 per

year over the next four years. What’s the payback period for the investment?

a. 3.0 years

b. 2.0 years

c. 2.5 years

d. 3.5 years

Question 15 

Which of the following is a capital component?

a. debt

b. accounts receivable

c. preferred stock

d. a and c above

Question 16 

When a firm introduces a new product and some of the new

product’s sales come at the expense of the firm’s existing

products, this is known as:

a. incremental costs.

b. marginal costs.

c. cannibalization.

d. sunk costs.

Question 17 

Bavarian Sausage has a beta of 0.8. The risk free rate is 3% and

the expected market risk premium is 5.6%. What is the company’s

cost of equity?

a. 8.6%

b. 7.0%

c. 7.48%

d. 11.6%

Question 18 

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Capital budgeting must be placed on an incremental basis. This means that ______ must be considered

and _______ must be ignored.

a. opportunity cost; sunk cost

b. cannibalization; opportunity cost

c. sunk cost; opportunity cost

d. sunk cost; financing cost

Question 19 

Which of the following is not a potential problem in using the

IRR as a capital budgeting technique?

a. no real solution for IRR

b. multiple IRRs

c. the scale problem

d. none of the above

Question 20 

Other things the same, if the market interest rates decrease, the NPV of a

project:

a. decreases.

b. is unaffected.

c. cannot be determined without knowing the discount rate.

d. increases.

Question 21 

XYZ Inc. is considering the purchase of a set of new equipment

that will have 4 year life and a total NPV cost of $105,000.

Assume a cost of capital of 9%. What is the equivalent annual

cost of the equipment (EAC)?

$31,832

$35,734

$31,250

$32,410

Question 22 

A firm pays annual dividend of $4.50 per shares to its preferred

stock holders, and the preferred stock’s current market price is

$52.00 per share. What is the firm's cost of preferred stock?

Question 23 

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$52.00 per share. What is the firm's cost of preferred stock?

a. 11.2%

b. 9.02%

c. 8.65%

d. 12.5%

You must know all the cash flows of an investment project to

compute its

a. NPV, IRR, PI, and discount payback period

b. NPV, payback period, IRR, PI

c. NPV, IRR, PI, payback period, and discount payback period

d. NPV, PI, IRR

Question 24 

Roger is considering the expansion of his business into a

property he purchased two years ago. Which of the following

items should be included in the analysis of this expansion?

a. Roger can lease the property to another company for $12,000

per year.

b. Costs of hiring additional staff

c.

The expansion will result in a slight increase of

inventory carried.

d. All of the above.

Question 25 

When the profitability index of a project is greater than 1, the NPV of the project is:

a. negative.

b. positive.

c. cannot be determined without knowing the discount rate.

d. equal to zero.

Question 26 

An increase in net working capital represents:

a. a decrease in fixed assets.

b. a cash inflow.

c. an increase in fixed assets.

d. a cash outflow.

Question 27 

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XYZ Inc. is evaluating a project. The project requires an

inital investment of $ 78 million, and has an estimated

NPV of $17 million. What is the profitability index of

this proposed project?

a. 1.22

b. 0.19

c. 0.22

d. 1.19

Question 28 

Which statement is true regarding WACC and its components?

a. The WACC should be used as the discount rate for all projects

that the firm considers.

b. The cost of debt of a firm is usually less than the cost of

equity of the firm.

c. For an allequity

firm, the cost of equity of the firm is

greater than the WACC of the firm.

d. The WACC may decrease if the firm uses less debt capital and

more equity capital.

Question 29 

Should a firm with plenty of resources invest in projects with NPV > $0?

a. The firm must look at the PI and IRR of the projects

b. The firm is indifferent between accepting or rejecting

projects with positive NPV

c. Yes

d. No

Question 30 

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Status NEW Posted 18 Dec 2017 06:12 PM My Price 10.00

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