Bus 401 Week 3 Quiz Version B

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This pack of BUS 401 Week 3 Quiz Version b shows the solutions to the following problems: 1. A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is: (Points : 1) 2. Zinc, Inc. is considering the acquisition of a new processing line. The processor can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the processor. A recently completed feasibility study that was performed at a cost of $45,000 indicated that the processor would produce a positive NPV. Studies have shown that employee-training expenses will be $150,000. What is the total investment in the processing line for capital budgeting purposes? (Points : 1) 3. A firm's cost of capital is influenced by (Points : 1) 4. Jones Company has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion? (Points : 1) 5. Given the following information on S G Inc.'s capital structure, compute the company's weighted average cost of capital. 6. Welltran Corp. can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years. The machine will be sold for $120,000 after taxes at the end of year five. What is the net present value of the machine if the required rate of return is 13.5%. (Points : 1) 7. A new machine can be purchased for $1,200,000. It will cost $35,000 to ship and $15,000 to modify the machine. A $12,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $180,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate $350,000. What is the investment cost of the machine for capital budgeting purposes? (Points : 1) 8. Kendall, Inc. has $15 million of outstanding bonds with a coupon rate of 10 percent. The yield to maturity on these bonds is 12.5 percent. If the firm's tax rate is 30 percent, what is relevant cost of debt financing to Kendall, Inc.? (Points : 1) 9. The simulation approach provides us with (Points : 1) 10. Porky Pine Co. is issuing a $1,000 par value bond that pays 8.5% interest annually. Investors are expected to pay $1,100 for the 12-year bond. Porky will pay $50 per bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35% tax bracket? (Points : 1)

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Business - General Business 1. Question : The appropriate cash flows for evaluating a corporate investment decision are: Student Answer: incremental additional cash flows. marginal after-tax cash flows. incremental after-tax cash flows. investment after-tax cash flows. Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows. Points Received: 1 of 1 Comments: 2. Question : The typical corporate investment requires a large cash outlay followed by several years of cash inflows. To make these cash flows comparable, we do which of the following? Student Answer: Adjust both cash outflows and inflows for taxes. Subtract interest charges to reflect the time value of money. Adjust both outflows and inflows for the effects of depreciation. Apply time value of money concepts and compare present values. Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows. Points Received: 1 of 1 Comments: 3. Question : If depreciation expense is a noncash charge, why do we consider it when determining cash flows? Student Answer: because depreciation expense reduces taxable income, so reduces the amount of taxes paid because depreciation expense offsets part of the initial cash outlay for depreciable assets because depreciation expense reduces net income because depreciation expense is a method for allocating costs Instructor Explanation: The answer can be found in Section 6.1: How to Compute Cash Flows. Points Received: 1 of 1 Comments: 4. Question : The internal rate of return is: Student Answer: the discount rate at which the NPV is maximized. the discount rate used by people within the company to evaluate projects. the rate of return that a project must exceed to be acceptable. the discount rate that equates the present value of benefits to the present value of costs. Instructor Explanation: The answer can be found in Section 7.1: Capital Budgeting Methods. Points Received: 1 of 1 Comments: 5. Question : Chapter 7 introduced three methods for evaluating a corporate investment decision. Which of the following is not one of those methods? Student Answer: payback period net present value (NPV) return on assets (ROA) internal rate of return (IRR) Instructor Explanation: The answer can be found in Section 7.1: Capital Budgeting Methods. Points Received: 1 of 1 Comments: 6. Question : In perfect capital markets, the capital structure decision is: Student Answer: important because it affects the cash flows to shareholders. important because debt and equity are taxed differently. irrelevant because the decision has no effect on cash flows. important sometimes. Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets. Points Received: 1 of 1 Comments: 7. Question : The interplay of the tax advantages of debt and the threat of bankruptcy results in: Student Answer: companies that have some optimal level of debt that maximizes firm value. all companies having a debt-to-equity ratio close to 50%. all companies having a debt-to-equity ratio close to 30%. capital structure being irrelevant. Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets. Points Received: 1 of 1 Comments: 8. Question : Costs associated with bankruptcy include: Student Answer: legal fees, managerial time shifted away from value creation, and loss of brand value. legal fees, additional inventory costs from sales growth, and loss of brand value. legal fees, managerial time shifted away from value creation, and increased market share. legal fees, employees leaving the company, and cost savings from lower labor costs. Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets. Points Received: 1 of 1 Comments: 9. Question : All else being equal, as debt replaces equity in a profitable company’s capital structure, which of the following occurs? Student Answer: Interest expense increases, reducing taxable income and reducing taxes. Interest expense increases, reducing net income and earnings per share. Interest expense increases, reducing cash flows available to shareholders. Interest expense increases, reducing profitability and the wealth of shareholders. Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets. Points Received: 1 of 1 Comments: 10. Question : Two important aspects of debt financing are its tax advantages and the threat of bankruptcy. As a company shifts to more and more debt financing: Student Answer: these factors reinforce one another, implying that more debt is always better. the tax advantage always outweighs bankruptcy risk. the threat of bankruptcy makes only very low levels of debt acceptable. the threat of bankruptcy eventually completely offsets the tax advantage of debt. Instructor Explanation: The answer can be found in Section 8.1: Perfect Capital Markets.

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