Question 1
Preferred stock is also a method of obtaining capital. When calculating the cost of preferred stock the effect of tax deductibility also needs to be taken into account.
True
False

Question 2
The cost to maturity for a bond with an expected current market value of $980, coupon 4%, 20 years to maturity is 4.15%.
True
False

Question 3
LTC Co. has a capital structure of 35% debt and 65% equity. Tax rate 40%. Risk free rate is 2%. RPm 5% Beta 1.3. Debt consists of a $3 million loan at stated rate of 6% and $2 million bonds at cost to maturity of 5%.
What is the cost of debt?
5.5%
3.3%
3.36%
4.16%

Question 4
LTC Co. has a capital structure of 35% debt and 65% equity. Tax rate 40%. Risk free rate is 2%. RPm 5% Beta 1.3. Debt consists of a $3 million loan at stated rate of 6% and $2 million bonds at cost to maturity of 5%.
What is the cost of equity?
6.5%
8.5%
3.9%
7%

Question 5
LTC Co. has a capital structure of 35% debt and 65% equity. Tax rate 40%. Risk free rate is 2%. RPm 5% Beta 1.3. Debt consists of a $3 million loan at stated rate of 6% and $2 million bonds at cost to maturity of 5%.
What is their WACC?
14%
6.68%
6.98%
6.7%

Question 6
Net present value is the discounted present value of all expected cash flows less the initial investment. The NPV for a project with a $28,000 initial investment and expected cash flows (already taking into account depreciation effect) of $12,000 for 3 years with a 11% discount rate is.
57,325
1,325
29,325
8,000

Question 7
IRR is the percentage where the discount rate equates the NPV to 0. The IRR for a project with a $28,000 initial investment and expected cash flows (already taking into account depreciation effect) of $12,000 for 3 years with a 11% discount rate is. 13.7%.
True
False

Question 8
Coffee is Life Company is considering purchasing a new coffee grinder. The installed cost is $100,000 and requires nominal increase in NWC (net working capital). It can be sold at the end of year 3 for an anticipated $30,000. se MACRS 3 year. Remember to add terminal cash flow.
Anticipated cash flows prior to depreciation: year 1 $40,000, year 2 $48,000, year 3 $20,000.
1. What is the operating cash flow (OCF) for year 3?
2. Calculate the NPV for this proposal if the cost of capital is estimated to be 10%. Use your OCF calculated.
3. What is the project IRR?
4. What is the project payback?
5. What is the project discounted payback?
6. Should they go forward with the project?

Question 9
Estimating cash flows is a critical component of capital budgeting and analysis where information is taken from different departments of the company to best estimate the cash flows
True
False

Question 10
Depreciation effect is not important in calculating capital projects since depreciation does not affect cash.
True
False

Question 11
You are analyzing 2 different software change options denoted as Project A and B. Project A has a 10% required return, initial investment of $20,000 and the below probabilities.
Probability(given) Cash Flow
Worse .2                10,000
Avg. .6                15,000
Best .2                25,000

Project B has a 12% required return and initial investment of $50,000 with below cash flows.
Probability Net cash flow
Worse .2                0
Avg. .6                35,000
Best .2                60,000

1. What is the expected value of the cash flows for both projects? (from above)
2. Which do we know is riskier just by looking at this data?
3. What is the risk adjusted NPV for both projects using a 3 year time period? (using the average cash flow per year)
a. 16,000 33,000
b. B based on range
c. -210.37 26,859

Question 12
If at 80% capacity with $20,000,000 in current sales the maximum amount of sales before adding fixed assets is $24,000,000
True
False

Question 13
Yellow Cab has sales of $3,600,000 COGS 40% of sales, operating expenses $1,080,000, interest expense $24,000, depreciation expense $64,000. Tax rate 40%. Dividend payout ratio is 30%. If they expect to grow at a rate of 15%, what next year's projected retained earnings be? Keep interest and depreciation expense at the current amount as they will not increase.

Question 14
There are 3 internal and 1 external governance mechanisms in the modern corporation.
True
False

Question 1 Preferred stock is also a method of obtaining capital....