Need Help with 13 questions about Financial Mgmt 313s3

Nov 11th, 2015
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13. A capital budgeting project has a net present value of $30,000 and a modified internal rate of

return of 15%. The project’s required rate of return is 13%. The internal rate of return is:

a. greater than $30,000

b. greater than 15%

c. between 13% and 15%

d. less than 13%



14. A new project is expected to generate $800,000 in revenues, $250,000 in cash operating

expenses, and depreciation expense of $150,000 in each year of its 10-year life. The

corporation’s tax rate is 35%. The project will require an increase in net working capital of

$85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is the

free cash flow from the project in year one?

a. $410,000

b. $375,000

c. $380,000

d. $298,000



15. A local restaurant owner is considering expanding into another rural area. The expansion

project will be financed through a line of credit with City Bank. The administrative costs of

obtaining the line of credit are $500, and the interest payments are expected to be $1,000

per month. The new restaurant will occupy an existing building that can be rented for $2,500

per month. The incremental cash flows for the new restaurant include:

a. $2,500 per month rent

b. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rent

c. $1,000 per month interest payments, $2,500 per month rent

d. $500 administrative costs, $2,500 per month rent



16. Which of the following should be included in the initial outlay?

a. increased investment in inventory and accounts receivable

b. preexisting firm overhead reallocated to the new project

c. first year depreciation expense on any new equipment purchased

d. taxable gain on the sale of old equipment being replaced



17. QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was

purchased for $50,000 nine years ago and has a current book value of $5,000. (The old

machine is being depreciated on a straight-line basis over a ten-year useful life.) The new

machine costs $100,000. It will cost the company $10,000 to get the new lathe to the factory

and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine

is also being depreciated on a straight-line basis over ten years. Sales are expected to increase

by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.

QRW’s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain

the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at

the end of the project’s ten-year life. What is the incremental free cash flow during year 1 of

the project?

a. $11,400

b. $15,200

c. $12,800

d. $14,400



18. The cost of retained earnings is less than the cost of new common stock because:

a. dividends are not tax deductible

b. flotation costs are incurred when new stock is issued

c. accounting rules allow a deduction when using retained earnings

d. marginal tax brackets increase



19. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percent

preferred stock, and 50 percent common equity indefinitely. The required return on each

component source of capital is as follows: debt--8 percent; preferred stock--12 percent;

common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of

return must the firm earn on its investments if the value of the firm is to remain unchanged?

a. 12.00 percent

b. 11.12 percent

c. 12.40 percent

d. 10.64 percent



20. Your firm is considering an investment that will cost $920,000 today. The investment will

produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in

year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the

investment’s internal rate of return?

a. 15.98%

b. 27.28%

c. 20.53%

d. 21.26%



21. The advantages of NPV are all of the following EXCEPT:

a. it provides the amount by which positive NPV projects will increase the value of the firm

b. it allows the comparison of benefits and costs in a logical manner through the use of time

value of money principles

c. it recognizes the timing of the benefits resulting from the project

d. it can be used as a rough screening device to eliminate those projects whose returns do

not materialize until later years



22. Which of the following are included in the terminal cash flow?

a. recapture of any working capital increase included in the initial outlay

b. the expected salvage value of the asset

c. any tax payments or receipts associated with the salvage value of the asset

d. all of the above



23. Which of the following differentiates the cost of retained earnings from the cost of newly

issued common stock?

a. the larger dividends paid to the new common stockholders

b. the flotation costs incurred when issuing new securities

c. the cost of the pre-emptive rights held by existing shareholders

d. the greater marginal tax rate faced by the now-larger firm



24. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000

and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs

$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in

year three, and $45,000 in year four. Lithium, Inc.’s required rate of return for these projects

is 10%. The profitability index for Project B is:

a. 1.55

b. 1.39

c. 1.33

d. 1.48



25. When terminating a project for capital budgeting purposes, the working capital outlay required

at the initiation of the project will:

a. increase the cash flow because it is recaptured

b. decrease the cash flow because it is an outlay

c. not affect the cash flow

d. decrease the cash flow because it is a historical cost


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