5/5/2015 Take Test: Exam 3 – FIN36040_2154_22156
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Take Test: Exam 3
Test Information
Description Exam 3 is closed book. It tests your understanding on contents in Chapter 8, 9, and 10. Exam 3
contains 30 multiple choice questions and problems. Exam 3 is available between 10:00 am 5/7
(Thursday) to 10:00 am 5/10 (Sunday). You have 90 minutes to finish it. You can do the exam twice. If
you are not satisfied with the score in your first attempt, you can go over the relevant contents and do
the exam a second time before it’s ended. If you plan to do Exam 3 only once, you should start doing
the exam no later than 7:30 am on 5/10/2015. Once the time is over, the exam will be stopped, and
your results will be automatically saved and submitted. The higher score of your two attempts will be
counted. No extention will be given if a student does not complete the exam during the scheduled
period.
Instructions
Timed Test This test has a time limit of 3 hours.This test will save and submit automatically when the time expires.
Warnings appear when half the time, 5 minutes, 1 minute, and 30 seconds remain.
| Multiple This test allows 2 attempts. This is attempt number 1. |
| Attempts |
Save All Answers Save and Submit
The appropriate cost of capital for a project depends on
a.the interest rate on the firm’s outstanding longterm bonds
b.the risk associated with the project
c. the type of assets used in the project (that is, whether they
are current or fixed assets)
d.the type of security issued to finance the project
| Question 1 | 3.33 points Saved |
Cash flows on an alternative investment that a firm decides not
to make are a(n):
| Question 2 | 3.33 points Saved |
Question Completion Status:
Remaining Time: 1 hour, 04
minutes, 06 seconds.
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| a.opportunity cost. b.sunk cost. c. terminal value. d.incremental cash flow. |
| Cash Flows that occur if and only if a project is accepted are: a.terminal costs. b.incremental cash flows. c. current cash flows. d.sunk costs. Question 3 3.33 points Saved |
| Net working capital increases when a.cost of goods sold falls, or interest rate rises b.inventory increases, accounts receivable increases, or accounts payable falls c. inventory falls, accounts receivable falls, or accounts payable increases d.operating expenses fall, or current assets decrease Question 4 3.33 points Saved |
| Nalcoa Corp. is financing a project that is in the same industry as its current portfolio of projects. If Nalcoa has a beta of 1.2 and the expected market risk premium is 5% while the risk free rate is 4% then what is the weighted average cost of capital for Nalcoa if it is, and plans to continue to be an all equity financed firm? a.there is not enough information to calculate the WACC b.9.5% c. 10.0% d.12.0% Question 5 3.33 points Saved |
| A project’s discount rate a.must be lower than the cost of funds for the firm’s current list of projects. b.must be high enough to compensate investors for the project’s risk. c. must be less than the WACC of the the firm. d.must be greater than the WACC of the the firm. Question 6 3.33 points Saved |
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must be greater than the WACC of the the firm.
| The Commerce Company is evaluating a project with the following cash flows: Cash Flow 0: $10,000 Year 1: $ 4,000, Year 2: $ 6,000 Year 3: $ 8,000 What is the net present value of the proposed Commerce Company project if the discount rate is 9%? a.$4,897.27 b.$5,347.52 c. $5,198.39 d.$3,357.41 Question 7 3.33 points Saved |
| Other things the same, if the market interest rates decrease, the IRR of a project: a.decreases. b.increases. c. is unaffected. d.cannot be determined without knowing the discount rate. Question 8 3.33 points Saved |
| Alpha Car Rental purchased 6 cars for a total of $120,000 three years ago. Now it is replacing the cars with newer vehicles. The book value company has depreciated 93% of the old cars, and sold these cars for a total of $ 30,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles? a.$30,000 b.$19,672 c. $18,000 d.$21,360 Question 9 3.33 points Saved |
| Future Semiconductor is considering the purchase of photolithography equipment that will cost $80,000. The equipment requires maintenance of $6,000 at the end of each of the next four years. After four years it will have no value at all. Assume a cost of capital of 10%. What is the present value of the cost of the equipment? a.$102,168 b.$99,019 Question 10 3.33 points Saved |
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| c. $96,761 d.$87,562 |
| A firm has a capital structure of 40% debt and 60% equity. Debt can be issued at a return of 9%, while the cost of equity for the firm is 12%. What is the firm’s WACC if the tax rate facing the firm is 30%? a.10.35% b.9.72% c. 11.78% d.8.92% Question 11 3.33 points Saved |
| Suppose a particular investment project will require an initial cash outlay of $800,000 and will generate a cash inflow of $350,000 in each of the next three years. What is the project’s IRR? Suppose a company’s required rate of return is 10%, should it accept the project? a.9.72%; accept the project b.13.82%; reject the project c. 8.93%; reject the project d.14.93%; accept the project Question 12 3.43 points Saved |
| CapCo has a capital structure that is composed of $20 million of debt and $80 million of common equity. If CapCo is in the 35% marginal tax rate, what is its WACC if the yield to investors on CapCo debt is 8% and the cost of CapCo common equity is 10%? a.9.75% b.8.35% c. 9.04% d.8.63% Question 13 3.33 points Saved |
| Everything else being equal a lower corporate tax rate a.will not affect the WACC of a firm with debt in its capital structure b.will decrease the WACC of a firm with only equity in its capital structure Question 14 3.33 points Saved |
c. will increase the WACC of a firm with debt and equity in its
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c.
| will increase the WACC of a firm with debt and equity in its capital structure d.will decrease the WACC of a firm with some debt in its capital structure |
| Gamma Electronics is considering the purchase of testing equipment that will cost $600,000 to replace old equipment. Assume the new machine will generate after‐tax savings of $200,000 per year over the next four years. What’s the payback period for the investment? a.3.0 years b.2.0 years c. 2.5 years d.3.5 years Question 15 3.33 points Saved |
| Which of the following is a capital component? a.debt b.accounts receivable c. preferred stock d.a and c above Question 16 3.33 points Saved |
| When a firm introduces a new product and some of the new product’s sales come at the expense of the firm’s existing products, this is known as: a.incremental costs. b.marginal costs. c. cannibalization. d.sunk costs. Question 17 3.33 points Saved |
| Bavarian Sausage has a beta of 0.8. The risk free rate is 3% and the expected market risk premium is 5.6%. What is the company’s cost of equity? a.8.6% b.7.0% c. 7.48% d.11.6% Question 18 3.33 points Saved |
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| Capital budgeting must be placed on an incremental basis. This means that ______ must be considered and _______ must be ignored. a.opportunity cost; sunk cost b.cannibalization; opportunity cost c. sunk cost; opportunity cost d.sunk cost; financing cost Question 19 3.33 points Saved |
| Which of the following is not a potential problem in using the IRR as a capital budgeting technique? a.no real solution for IRR b.multiple IRRs c. the scale problem d.none of the above Question 20 3.33 points Saved |
| Other things the same, if the market interest rates decrease, the NPV of a project: a.decreases. b.is unaffected. c. cannot be determined without knowing the discount rate. d.increases. Question 21 3.33 points Saved |
| XYZ Inc. is considering the purchase of a set of new equipment that will have 4 year life and a total NPV cost of $105,000. Assume a cost of capital of 9%. What is the equivalent annual cost of the equipment (EAC)? $31,832 $35,734 $31,250 $32,410 Question 22 3.33 points Saved |
| A firm pays annual dividend of $4.50 per shares to its preferred stock holders, and the preferred stock’s current market price is Question 23 3.33 points Saved |
$52.00 per share. What is the firm’s cost of preferred stock?
5/5/2015 Take Test: Exam 3 – FIN36040_2154_22156
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$52.00 per share. What is the firm’s cost of preferred stock?
| a.11.2% b.9.02% c. 8.65% d.12.5% |
| You must know all the cash flows of an investment project to compute its a.NPV, IRR, PI, and discount payback period b.NPV, payback period, IRR, PI c. NPV, IRR, PI, payback period, and discount payback period d.NPV, PI, IRR Question 24 3.33 points Saved |
| Roger is considering the expansion of his business into a property he purchased two years ago. Which of the following items should be included in the analysis of this expansion? a.Roger can lease the property to another company for $12,000 per year. b.Costs of hiring additional staff c. The expansion will result in a slight increase of inventory carried. d.All of the above. Question 25 3.33 points Saved |
| When the profitability index of a project is greater than 1, the NPV of the project is: a.negative. b.positive. c. cannot be determined without knowing the discount rate. d.equal to zero. Question 26 3.33 points Saved |
| An increase in net working capital represents: a.a decrease in fixed assets. b.a cash inflow. c. an increase in fixed assets. d.a cash outflow. Question 27 3.33 points Saved |
5/5/2015 Take Test: Exam 3 – FIN36040_2154_22156
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XYZ Inc. is evaluating a project. The project requires an
inital investment of $ 78 million, and has an estimated
NPV of $17 million. What is the profitability index of
this proposed project?
a.1.22
b.0.19
c. 0.22
d.1.19
| Question 28 | 3.33 points Saved |
Which statement is true regarding WACC and its components?
a.The WACC should be used as the discount rate for all projects
that the firm considers.
b.The cost of debt of a firm is usually less than the cost of
equity of the firm.
c. For an allequity firm, the cost of equity of the firm is
greater than the WACC of the firm.
d.The WACC may decrease if the firm uses less debt capital and
more equity capital.
| Question 29 | 3.33 points Saved |
Should a firm with plenty of resources invest in projects with NPV > $0?
a.The firm must look at the PI and IRR of the projects
b.The firm is indifferent between accepting or rejecting
projects with positive NPV
c. Yes
d.No
| Question 30 | 3.33 points Saved |
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