BUS 370 EXAM #3 QUESTIONS WITH VERIFIED
ACCURATE ANSWERS
Two projects are considered to be independent if - Answers - selecting one would have
no bearing on accepting the other, & their cash flows are unrelated.
Two projects are considered to be mutually exclusive if - Answers - the projects perform
the same function & selecting one would automatically eliminate accepting the other.
There is no economic rational that links the payback method to shareholder wealth
maximization - Answers - true
The IRR is the discount rate that makes the NPV greater than zero - Answers - false
The internal rate of return is - Answers - the discount rate that makes the NPV equal to
zero
In evaluating capital projects, the decisions using the NPV method and the IRR method
may disagree if - Answers - the cash flows pattern is unconventional & the projects are
mutually exclusive
Contingent projects would imply that - Answers - the acceptance of one project is
dependent on the acceptance of the other, & the projects can be either mandatory or
optional
Gao enterprices plans to build a new plant at a cost of $3,250,000. The plant is
expected to generate annual cash flows of $1,225,000 for the next five years. If the
firm's required rate of return is 18 percent, what is the NPV of this project? - Answers -
$580,785
Carmen Electronics bought new machinery for $5 million. This is expected result in
additional cash flows of $1.2 million over the next seven years. What is the payback
period for this project? If their acceptance period is five years, will this project be
accepted? - Answers - 4.17 years; yes
LaGrange Corp. has forecasted that over the next four years the average annual after-
tax income will be $45,731. The average book value of the manufacturing equipment
that is used is $167,095. What is the accounting rate of return? - Answers - 27.4%
Internal rate of return: Modern Federal Bank is setting up a brand new branch. The cost
of the project will be $1.2 million. The branch will create additional cash flows of
$235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of
capital is 12 percent. What is the internal rate of return on this branch expansion? -
Answers - 23%
, Internal rate of return: Lowell Communications, Inc., has been installing a fiber-optic
network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over
the next 10 years. What is this project's internal rate of return? - Answers - 16%
Payback: Elmer Sporting Goods is getting ready to produce a new line of golf clubs by
investing $1.85 million. The investment will result in additional cash flows of $525,000,
$812,500 and 1,200,000 over the next three years. What is the payback period for this
project? - Answers - 2.43 years
A firm's overall cost of capital is - Answers - a weighted average of the costs of capital
for the collection of individual projects that the firm is working on.
The finance balance sheet is - Answers - the same as the accounting balance sheet,
but it is based on market values.
When estimating the cost of debt capital for the firm, we are primarily interested in -
Answers - The cost of long-term debt
Long-term debt typically describes - Answers - Debt with a maturity greater than one
year.
Which of the following need to be excluded from the calculation of the firm's amount of
permanent debt? - Answers - Revolving lines of credit
A bond has a coupon rate of 6% and the bond makes semiannual coupon payments.
The dollar amount of coupon interest received every six months is - Answers - $30
Bond issuance costs include - Answers - investment banking fees.
legal fees.
accountant fees
The recommended model to estimate the cost of common equity for a firm is - Answers
- the CAPM
In order to use the WACC to evaluate a future project's flows, which of the following
must hold? - Answers - The project will be financed with the same proportion of debt
and equity as the firm. The systematic risk of the project is the same as the overall
systematic risk of the firm.
How firm estimate their cost of capital: The WACC for a firm is 13.00 percent. You know
that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%
What proportion of the firm is financed with debt? - Answers - 70%
ACCURATE ANSWERS
Two projects are considered to be independent if - Answers - selecting one would have
no bearing on accepting the other, & their cash flows are unrelated.
Two projects are considered to be mutually exclusive if - Answers - the projects perform
the same function & selecting one would automatically eliminate accepting the other.
There is no economic rational that links the payback method to shareholder wealth
maximization - Answers - true
The IRR is the discount rate that makes the NPV greater than zero - Answers - false
The internal rate of return is - Answers - the discount rate that makes the NPV equal to
zero
In evaluating capital projects, the decisions using the NPV method and the IRR method
may disagree if - Answers - the cash flows pattern is unconventional & the projects are
mutually exclusive
Contingent projects would imply that - Answers - the acceptance of one project is
dependent on the acceptance of the other, & the projects can be either mandatory or
optional
Gao enterprices plans to build a new plant at a cost of $3,250,000. The plant is
expected to generate annual cash flows of $1,225,000 for the next five years. If the
firm's required rate of return is 18 percent, what is the NPV of this project? - Answers -
$580,785
Carmen Electronics bought new machinery for $5 million. This is expected result in
additional cash flows of $1.2 million over the next seven years. What is the payback
period for this project? If their acceptance period is five years, will this project be
accepted? - Answers - 4.17 years; yes
LaGrange Corp. has forecasted that over the next four years the average annual after-
tax income will be $45,731. The average book value of the manufacturing equipment
that is used is $167,095. What is the accounting rate of return? - Answers - 27.4%
Internal rate of return: Modern Federal Bank is setting up a brand new branch. The cost
of the project will be $1.2 million. The branch will create additional cash flows of
$235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of
capital is 12 percent. What is the internal rate of return on this branch expansion? -
Answers - 23%
, Internal rate of return: Lowell Communications, Inc., has been installing a fiber-optic
network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over
the next 10 years. What is this project's internal rate of return? - Answers - 16%
Payback: Elmer Sporting Goods is getting ready to produce a new line of golf clubs by
investing $1.85 million. The investment will result in additional cash flows of $525,000,
$812,500 and 1,200,000 over the next three years. What is the payback period for this
project? - Answers - 2.43 years
A firm's overall cost of capital is - Answers - a weighted average of the costs of capital
for the collection of individual projects that the firm is working on.
The finance balance sheet is - Answers - the same as the accounting balance sheet,
but it is based on market values.
When estimating the cost of debt capital for the firm, we are primarily interested in -
Answers - The cost of long-term debt
Long-term debt typically describes - Answers - Debt with a maturity greater than one
year.
Which of the following need to be excluded from the calculation of the firm's amount of
permanent debt? - Answers - Revolving lines of credit
A bond has a coupon rate of 6% and the bond makes semiannual coupon payments.
The dollar amount of coupon interest received every six months is - Answers - $30
Bond issuance costs include - Answers - investment banking fees.
legal fees.
accountant fees
The recommended model to estimate the cost of common equity for a firm is - Answers
- the CAPM
In order to use the WACC to evaluate a future project's flows, which of the following
must hold? - Answers - The project will be financed with the same proportion of debt
and equity as the firm. The systematic risk of the project is the same as the overall
systematic risk of the firm.
How firm estimate their cost of capital: The WACC for a firm is 13.00 percent. You know
that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%
What proportion of the firm is financed with debt? - Answers - 70%
