Multiple Choice Questions (52 points) for year I. An investment cost SI0,000 wit
ID: 2732070 • Letter: M
Question
Multiple Choice Questions (52 points) for year I. An investment cost SI0,000 with cash for the project. rate is 82%. The NPV and the IRR is The discou A) so: 15.2382% B) S3.33; 27.2242%. $5,000; 0% the other value as input. D) Can not answer without one or 2. The Balistan Rug Company is considering investing in a new loom that will cost each of s12,000. The new loom will create positive end year cash flow of s5,000 for the next 3 years. The intemal rate of return for this project is A) 10%. B) 11%. C) 12%. D) 13% 3. A firm has 35%, 15%, and 50% of long-term debt, preferred stock and common stock, respectively for its total capital. If the before-tax costs of capital are 10%, 12%, and 18%, respectively, what is the weighted average cost of capital (WACC) for the firm? Assume that the tax rate is 40%. 8.58% b. 12.18% c. 12.90% d. 14.30% 4. The increase in risk to equityholders when financial leverage is introduced is evidenced a. higher EPS as EBIT increases. b, a higher variability of EPS with debt than all equity. c, increased use of homemade leverage. d. the same value between levered and unlevered firms. 5. MM Proposition I with taxes is based on the concept that: equity a. the optimal capital structure is the one that is totally financed with b. the capital structure of the firm does not matter because investors can use homemade leverage. weighted average cost c. the firm of firm stays the same with leverage because the of capital stays the same. d. the value of the firm increases as total debt increases because of the interest tax shield. 6. An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has A) a large initial investment with moderate positive cash flows over a very long period of time B) a very large negative cash flow at the termination of the project. C) most of the cash flows at the beginning of the project. D) All projects approved by the payback period rule will be accepted by the NPV rule.Explanation / Answer
1-A: 0,15.2382%
Statement of calculation of net present value
1
year
Particular
pvf@15.2382%
Amount
Present value
1
inflow
0.8678
3000
2603
2
0.753
3000
2259
3
0.6534
3000
1960
4
0.567
3000
1701
5
0.492
3000
1476
10000
0
outflow
1
10000
10000
Net Present Value
0
The internal rate of return (IRR) on a project is the rate of return at which the projects NPV equals zero. At this point, a project's cash flows are equal to the project's costs.
2- C : 12%
2
IRR
Lower rate+[NPV at lower rate/(NPV at lower rate -NPV at higher rate)*Higher rate-lower rate
10+[435/{435-(584)}]*15-10
10+435/1019*5
12.13%
Assume Rate of interest @10%
NPV at 10% discount rate
Present value at 10% dsicount rate
Annual inflow
5000
PVIFA.10,3
2.4869
Present value
12435
Outflow
12000
Net Present value
435
Assume Rate of interest @15%
NPV at 15% discount rate
Present value at 15% dsicount rate
Annual inflow
5000
PVIFA.15,3
2.2832
Present value
11416
Outflow
12000
Net Present value
($584.00)
3-D: 14.3%
3
Statement of WACC
Source
Weight(a)
Cost(b)
(a)*(b)
Long term debt
0.35
0.1
0.035
Preferred stock
0.15
0.12
0.018
Common stock
0.5
0.18
0.09
0.143
14.30%
4-D :Same the value between levered and unlevered
5-D: The value of the firm increases as total debt increases of the interest tax shield
6- B : A very large negative cash flow at the termination project
Statement of calculation of net present value
1
year
Particular
pvf@15.2382%
Amount
Present value
1
inflow
0.8678
3000
2603
2
0.753
3000
2259
3
0.6534
3000
1960
4
0.567
3000
1701
5
0.492
3000
1476
10000
0
outflow
1
10000
10000
Net Present Value
0
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