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89 Cards in this Set
- Front
- Back
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How to calculate IRR
(2 steps) |
1. Enter in Cash flows
2. Hit CPT + IRR + CPT |
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How to calculate NPV
(3 steps) |
1. Enter in cash flows
2. Hit NPV and enter in interest rate 3. Arrow down, hit CPT |
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How to calculate MIRR
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1. Calculate NPV
2. Enter in NPV value to PV, number of cash flows into N, the above interest rate into I/Y, and CPT FV 3. Put the found FV into FV, the initial investment into PV, and number of cash flows into N, and CPT I/Y |
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After tax cost of debt can best be described as:
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AT kd = kd(l-T)
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The cost of preferred stock can best be described as:
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kp = Dp/(Pp-f)
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The component cost of capital is best described as:
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cost of capital provided by a given creditor or stockholder
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The after tax cost of debt on a 9% $200,000 loan given a 30% tax bracket for the firm would be:
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6.3%
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The cost of retained earnings is:
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rate of return necessary to justify not making dividend payments
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If the dividends paid on a preferred stock issue are $3 per share and the cost of preferred stock is 12%, calculate the price of the stock. Assume there are no flotation costs.
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$25
(3/.12) |
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All else equal, a firm with low levels of debt may prefer debt financing because:
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of tax advantages and the cost advantage debt has over equity
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The after tax cost of debt on a 6% $50,000 loan given a 35% tax bracket would be:
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3.9%
(.06(1-.35)) |
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How to calculate the after tax cost of debt
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After tax cost of debt = before tax cost of debt (1-marginal tax rate)
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If the dividends paid on a preferred stock issue are $5 per share and the price of new stock after subtracting flotation costs is $25, calculate cost of preferred stock.
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20%
5/25 = 20% |
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Cost of capital can best be defined as:
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compensation demanded by the investor in a firm after taxes and transaction costs of the firm are considered.
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How to calculate the cost of preferred stock:
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Dividends/ price of new stock after flotation costs
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Where is the cost of equity depicted on a company's income statement?
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It is not. The cost of equity is not an accounting cost.
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The cost of capital from a specific source used in determining the weighted average cost of capital is called:
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the component cost of capital.
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The after-tax cost to a company with a tax rate of 40% of 8% coupon bonds sold to yield 9% is:
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5.4%
(.09(1-.4) |
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What is the after-tax component cost of a $7 dividend, $100 par, preferred stock issued years ago, but selling for $85 today? The are no flotation costs. The company's tax rate is 40%.
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8.24%
7/85 = .08235 |
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The presence of flotation costs related to the issuance of new securities tends to:
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increase the component costs of capital.
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The cost of internal common equity refers to:
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the required rate of return on projects financed with earnings retained and invested in the company.
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What is the component cost of equity capital for a stock selling for $50, that is expected to pay a dividend of $4 next year, with an expected constant growth rate of 12%?
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20%
4/50=8% 8%+12%=20% |
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Thorton Corp. plans to finance a $1 million project with 30% debt and 70% equity. The before tax cost of debt is 8%; the cost of equity is 20%. Thorton's tax rate is 40%. Calculate the weighted average cost of capital (WACC).
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15.44%
8%(1 - 0.4)(0.3) + 20%(0.7) = 15.44% |
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How to calculate WACC
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before tax cost of debt(1-tax rate)(percent financed through debt)+cost of equity(percent financed through equity)
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The mixture of long-term debt, preferred stock, and common equity used to finance a business is called the:
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capital structure
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If the business is using internal equity, or retained earnings, as its exclusive equity source for capital budgeting investments this year, then the firm’s WACC is the same as:
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its marginal cost of capital (MCC)
or the cost of equity. |
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5 Factors affecting cost of capital
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General economic conditions
market conditions operating decisions financial decisions amount of financing |
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General market conditions affect:
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interest rates
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market conditions affect:
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risk premiums
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operating decisions affect:
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business risk
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financial decisions affects:
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financial risk
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Amount of financing affects:
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flotation costs and market price of security
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how to calculate the cost of preferred stock
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dividend/ market price- flotation costs
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retained earnings are known as what kind of equity
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internal equity
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common stock is known as what kind of equity
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external equity
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cost of internal equity=
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opportunity cost of common stockholders' funds
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how to calculate internal equity
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internal equity = (dividend in 1 yr/ current price) + growth rate
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T/F: Internal equity is cheaper than external equity
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True
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How to calculate the breakpoint
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Breakpoint= Available amount of capital component/ % that component is in capital structure
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Given the following information, calculate NPV: Initial investment is $50,000; inflows for the next four years are $12,000, $4,000, $12,000, $13,000; required rate of return is 8%.
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-$16,378
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Calculate the payback period for the following investment: A machine costs $100,000 with installation costs of $15,000. Cash inflows are expected to be 26,000 per year for the next seven years.
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4.42 years
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A problem associated with the payback method is:
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it doesn't consider cash flows after the payback period
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Given the following information, calculate the net present value:
Initial outlay is $50,000; required rate of return is 10%; current prime rate is 12%; and cash inflows for the next 4 years are $60,000, $30,000, $40,000, and $50,000. |
$93,542
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Calculate the IRR for the following investment project:
Initial investment is $75,000; inflows are $20,000 for the next five years; Required rate of return is 15%. (Round your answer to the nearest whole percentage) |
10%
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The internal rate of return is best described as that discount rate which:
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makes the NPV equal zero
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An acceptable net present value has a value:
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= or > 0
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If the NPV of a project is $500 and the required rate of return is 8%, the IRR must be:
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>8%
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The payback period is best defined as:
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the time it takes to receive cash flows sufficient to cover your initial investment
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Independent projects:
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do not compete with eachother
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What is the sequence of decision-making in the capital budgeting process?
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Accept/reject; ranking mutually exclusive projects
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Calculate the payback for a project with a $7,500 outlay that has annual cash flows of $2,500/year for four years.
Hint: Follow the definition of the payback method. |
3 years
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Which of the following are problems with the payback method that are over comely the NPV method?
Hint: Compare and contrast the payback and NPV methods. |
The cash flows beyond the payback period and the time value of money or timing of cash flows are not considered.
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A project under consideration has an NPV of $4,000. Which of the following best applies?
Hint: How do we interpret the NPVs that we calculate? |
The project NPV of $4,000 indicates an increased value for shareholders of $4,000 and the project should be accepted.
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Which of the following is the correct method of calculating the NPV of a project?
Hint: How is the NPV calculated? |
The initial outlay of the project is subtracted from the sum of discounted cash in flows to determine the project NPV.
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The NPV profile is a graph that plots the value of NPV for values of:
Hint: Holding the expected cash flows constant, what variable is likely to change the NPV? |
discount rate
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The internal rate of return is the discount rate that:
Hint: Solving for a discount rate! |
produces a zero NPV.
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What is the decision rule associated with the internal rate of return?
Hint: In what situation would the IRR point to an acceptable project? |
Accept all projects with an IRR greater than or equal to required rate of return.
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If capital rationing limits the investment in all +NPVs, the manager should:
Hint: Looking for a decision rule. |
accept the combination of projects within the capital budget limit that maximizes NPVs.
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To incorporate risk in the capital budgeting process, a risk-adjusted discount rate (RADR) is used:
Hint: Think of the risk/return tradeoff. |
adjusts the discount rate according to the risk associated with the project being evaluated.
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Which of the following items would not represent an incremental cash flow?
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existing overhead expense
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If a new machine requires an increase in current assets from $50,000 to $60,000 and current liabilities from $30,000 to $50,000, the dollar change in net working capital is:
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negative
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The relevant cash flows in capital budgeting can best be described as:
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incremental cash flows
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When the used asset is eventually sold for less than its depreciated book value:
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The firm's tax liability is reduced by the amount of the loss times the ordinary income tax rate
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You have purchased equipment costing $100,000 and will depreciate it according to the MACRS five-year schedule. You have a 40% tax rate and sell the equipment for $25,000 at the end of year four. The MACRS percentages for years 1-6 are 20, 32, 19.2, 11.5, 11.5, and 5.8. Calculate your taxes on the sale.
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$3,080
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What is the relevant cash flow in year three for the following projected cash flows of a new and an old machine?
Year New Old 0 0 0 1 $100,000 $75,000 2 123,672 70,000 3 125,000 70,000 |
$55,000
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What is the relevant initial cash outflow for the following project?
Equipment cost $50,000 Installation $ 5,000 Cash increase needed $ 2,000 Inventory increase needed $ 3,000 Accounts payable increase $ 2,000 |
$58,000
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What is the relevant initial cash outflow of the following project for capital budgeting analysis purposes?
Equipment cost $100,000 Installation 20,000 Delivery 3,000 Consultant fees for regulation impact study 15,000 Change in operating expenses 5,000/year |
$123,000
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With respect to changes in net working capital, which of the following could likely happen as sales increase?
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increase in accounts receivable
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Depreciation associated with a project will:
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cause incremental operating cash flows to increase
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The relevant cash flows of a capital budgeting project are:
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the incremental after-tax cash flows which occur, given the decision to proceed with the new project.
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Cash flows that have preceded the decision to proceed with the project or that have been committed to are:
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sunk
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Which of the following is not generally included in the initial outlay of a capital budgeting project?
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The sale of the new facility at the end of its useful life
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Morton Corp. is considering additional production facilities and expects inventory to increase by $4 million, accounts receivable by $3 million, and accounts payable by $2 million. If other working capital accounts stay the same, what amount of added net working capital should be considered as part of the initial outlay of this project?
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$5 million
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While depreciation is not an operating cash flow, it is relevant in a capital budgeting evaluation of operating cash flows because:
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depreciation, a non-cash expense, impacts the pre-tax operating cash flows, the taxes paid, and the after-tax cash flows.
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An added annual depreciation amount of $60,000 associated with a project under evaluation will increase operating cash flows by ______ for a company with a 40% tax rate.
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$24,000
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A company is considering replacing extrusion equipment on its production line. The old equipment can be sold for $80,000 and has a book value of $70,000. If it has a 40% tax rate, what is the total incremental cash flow related to selling the old equipment?
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$76,000
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Thomas Corp. is considering the purchase of a new machine that will generate an additional $100,000 in revenue and cost savings of $20,000 per year. The first year depreciation on the machine is $30,000. What are the after-tax operating cash flows for the first year? Thomas has a tax rate of 40%.
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$84,000
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In a capital budgeting project evaluation, the financing costs are considered when:
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estimating the discount rate used in the NPV method.
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Morgan Corp. is studying the incremental cash flows of a pending replacement investment. In Year 1, the new investment will increase cash revenues by $40,000 per year and reduce cash labor expenses by $20,000. The added MACRS depreciation expense is $15,000 and Morgan Corp. has a 40% tax rate. What is the incremental after-tax cash flow for Year 1?
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$42,000
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The discounted cash flow model for bonds:
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uses the required rate of return to discount all promised bond cash flows
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If the yield-to-maturity of a bond is less than the coupon rate, the bond will sell at:
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a premium
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A bond is selling for 95% of par and has an annual coupon rate of 6% and will mature in five years. There are semi-annual coupon payments. Calculate the yield-to-maturity on an annualized basis (APR).
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7.21%
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A bond is selling for 105% of par, has a coupon rate of 7%, and will mature in five years. There are annual coupon payments. Calculate the yield-to-maturity on an annualized basis.
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5.82%
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A ten-year $10,000 face-value bond with semi-annual coupon payments has an 8% annual coupon rate and a 9% annual YTM. It is selling for 93.45% of par. What are the semi-annual interest payments?
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$400
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Cash payments from preferred stock are:
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discounted as a perpetuity
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The price of a preferred stock is $42. It pays a dividend of $5. Calculate the required return:
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11.9%
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Given the following information, calculate the dividend to be paid in one year for this common stock using the constant growth dividend valuation model: Price = $50 Expected Growth = 5% Required Return = 7%
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$1.00
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Given the following information, calculate the price paid for this common stock: Expected Growth rate = 4% Dividend at t1 = $3.50 Req. Rate of Return = 8%
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$87.50
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A preferred stock is paying a dividend of $4.50 and has a required return of 10%. Calculate its price:
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$45.00
4.50/.1 |
