Which of the answers following these questions are correct? 3. Five Rivers Casin

Question

Which of the answers following these questions are correct?

3. Five Rivers Casino is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Gamblers flotation expense on the new bonds will be $50 per bond. Gamblers marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds? (Points : 1)
8.76%
8.12%
7.49%
10.25%


4. Zinc, Inc. is considering the acquisition of a new processing line. The processor can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the processor. A recently completed feasibility study that was performed at a cost of $45,000 indicated that the processor would produce a positive NPV. Studies have shown that employee-training expenses will be $150,000. What is the total investment in the processing line for capital budgeting purposes? (Points : 1)
$4,550,000
$4,700,000
$4,955,500
$5,000,500


5. 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%


6. If depreciation expense in year one of a project increases for a highly profitable company, (Points : 1)
net income decreases and incremental free cash flow decreases.
net income increases and incremental free cash flow increases.
the book value of the depreciating asset increases at the end of year one.
net income decreases and incremental free cash flow increases.

8. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal? (Points : 1)
increase in accounts receivable
cost of issuing new bonds if the project is financed by a new bond issue
installation costs
none of the above - all are considered


9. Higgins Office Corp. 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 Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged? (Points : 1)
12.40 percent
12.00 percent
11.12 percent
10.64 percent


10. A new machine can be purchased for $1,800,000. It will cost $35,000 to ship and $15,000 to fine-tune the machine. The new machine will replace an older version that is fully depreciated and will be sold for $200,000. The firm's income tax rate is 35%. What is the initial outlay for capital budgeting purposes? (Points : 1)
$1,580,000
$1,630,000
$1,650,000
$1,720,000

Explanation / Answer

3. 8.76% 4. $5,000,500 5. 11% 6. net income increases and incremental free cash flow increases. 8.increase in accounts receivable . 9.11.12 percent

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