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Question description

1. PDF 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 lathe 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. PDF'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 project's terminal cash flow? (Points : 1)
  $3,000
  $5,000
  $6,000
  $8,000

2. A firm's cost of capital is influenced by (Points : 1)
  the current ratio.
  par value of common stock.
  capital structure.
  net income.

3. 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)
  13.75 percent
  8.75 percent
  7.00 percent
  3.75 percent

4. Zellars, 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. Zellars, Inc.'s required rate of return for these projects is 10%. The net present value for Project A is (Points : 1)
  $12,358.
  $16,947.
  $19,458.
  $26,074.

5. Zellars, 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. Zellars, Inc.'s required rate of return for these projects is 10%. The net present value for Project B is (Points : 1)
  $58,097.
  $66,363.
  $74,538.
  $112,000.

6. Asian Trading Company paid a dividend yesterday of $5 per share (D= $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company's stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company's marginal tax rate is 35%. Based on the above information, the cost of new common stock is (Points : 1)
  28.38%.
  24.12%.
  26.62%.
  31.40%.

7. Given the following annual net cash flows, determine the internal rate of return to the nearest whole percent of a project with an initial outlay of $750,000.

 YEAR NET CASH FLOW
  1 $500,000
  2  $150,000
  3  $250,000 (Points : 1)
  9%
  11%
  13%
  15%

8. Asian Trading Company paid a dividend yesterday of $5 per share (D= $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company's stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is (Points : 1)
  28.38%.
  24.12%.
  26.62%.
  31.40%.

9. 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)
  18.87%.
  17.72%.
  14.26%.
  12.94%.

10. Clanton Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn $30 million in net income next year and retain 40% of it, how large can the capital budget be before common stock must be sold? (Points : 1)
  $7.5 million
  $12.0 million
  $15.5 million
  $16.0 million

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(Top Tutor) Daniel C.
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School: Duke University
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