1. There are 33 multiple choice questions. Please select the


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May 12, 2015. 1. There are 33 multiple choice questions. Please select the correct answer for each. I tip for a job well done. Question 1 RCA is considering two independent projects, X and Y. Both projects have a cost of capital of 14%. The cash flows that the projects will produce are: Year 0 1 2 3 Project X $(9,000) 4,000 4,000 4,000 Project Y $(10,334) 3,000 5,000 6,000 RCA uses the IRR method for project selection. Based on the above data, RCA should accept: a. Both projects b. Project X, but not Project Y c. Project Y, but not Project X d. Neither project . Question 2 Sibling Company’s common stock has a beta of 1.40. If the risk-free rate of return is 7% and the market offers a premium of 8% over the risk free rate, what is the expected return on Sibling’s stock? a. 8.4% b. 11.2% c. 14.4% d. 18.2% . Question 3 Which of the following investors incurs the least risk? a. bondholders b. preferred stockholders c. common stockholders d. all of the above bear equal risk . Question 4 Castle Corp. generated $2 million in operating profits. The firm’s corporate tax rate was 40%. If the WACC was 12%, what was the value of the firm? a. $6.7 million b. $10 million c. $12.3 million d. $16.7 million . Question 5 If the market price of a bond increases, then: a. the yield to maturity decreases b. the coupon rate decreases c. the yield to maturity increases d. none of the above . Question 6 The Acme Company is analyzing a project that has a cost of capital of 10%. The project’s estimated cost is $200,000. The cash flows that the project is expected to generate are as follows. Year 1 2 3 4 5 Cash flow $75,000 $85,000 $95,000 $65,000 $15,000 The discounted payback period for this project is: a. 2.42 years b. 2.86 years c. 3 years d. 3.72 years . Question 7 Metals, Inc. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common stock. The after-tax cost of debt is 5.25%, preferred stock has a required rate of return of 6.35%, and common stock has a required rate of return of 14.05%. What is Metals’ WACC? a. 4.50% b. 8.33% c. 10.84% d. 12.78% . Question 8 Wannabe a Brave, Inc. (WaB) is considering the purchase of a new machine which is expected to increase EBITDA by $5,000 annually. Due to this increase, WaB expects that its working capital will increase $3,000 for the project. The company will use the straight-line method to depreciate the $20,000 purchase price over the project’s 5 year economic life. The salvage value will be zero. The firm has a marginal tax rate of 34 percent and a cost of capital of 12 percent. The machine’s after-tax operating cash flows for years 1-5 are _________. a. $10,000 b. $4,660 c. $5,980 d. $1,980 . Question 9 RRR Co. has a debt ratio of 45%. What is its Debt-to-Equity ratio? a. 45% b. 55% c. 82% d. 122% . Question 10 A stock dividend and a stock split are similar in that _____. a. cash is paid out and the number of shares outstanding increases b. no cash is paid out and the number of shares outstanding increases c. both changes affect only the common stock account d. cash is paid out and the only other effect is on the retained earnings account e. they are totally dissimilar . Question 11 Wannabe a Brave, Inc. (WaB) is considering the purchase of a new machine which is expected to increase EBITDA by $5,000 annually. Due to this increase, WaB expects that its working capital will increase $3,000 for the project. The company will use the straight-line method to depreciate the $20,000 purchase price over the project’s 5 year economic life. The salvage value will be zero. The firm has a marginal tax rate of 34 percent and a cost of capital of 12 percent. The machine’s initial cash outlay is ________. a. $23,000 b. $21,000 c. $20,000 d. $17,000 . Question 12 Katie’s Chocolates imports raw chocolate from Brazil. The current cost of chocolate in the spot market is $2.38 per pound. The company’s total imports are 200,000 pounds per year. …

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