QUESTIONS :
1) A corporation is considering expanding operations to meet growing demand. Withthe capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is
a. a decrease of $40,000.
b. a decrease of $120,000.
c. an increase of $120,000.
d. an increase of $60,000.
2) A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.
a. $42,000
b. $54,240
c. $52,440
d. $50,000
3) A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal cash flow is
a. $24,000.
b. $14,000.
c. $26,000.
d. $16,000.
4) What is the payback period for Tangshan Mining company’s new project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
a. 3.33 years.
b. 4.33 years.
c. 2.33 years.
d. None of the above
5) Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
a. No.
b. Yes.
c. It depends.
d. None of the above
6) What is the NPV for the following project if its cost of capital is 0 percent and itsinitial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4?
a. $371,764.
b. $137,053.
c. $1,700,000.
d. None of the above
7) What is the IRR for the following project if its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
a. 11.44%.
b. 9.67%.
c. 5.83%.
d. None of the above
8) Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y alsocosts $600, and generates cash flows of $500 and $275 for the next 2 years, respectively. Which investment should the firm choose if the cost of capital is 25 percent?
a. Project Y.
b. Project X.
c. Neither.
d. Not enough information to tell.
9) A corporation has $5,000,000 of 10 percent bonds and $3,000,000 of 12 percent preferred stock outstanding. The firm’s financial breakeven (assuming a 40 percent tax rate) is
a. $860,000.
b. $716,000.
c. $1,400,000.
d. $1,100,000.
10) Nico Trading Company must choose its optimal capital structure. Currently, the firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share. Dividends are expected to remain at this level indefinitely. Stockholders currently require a 12.1 percent return on their investment. Nico is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 30 percent, it will increase its expected dividend to $5.82 per share. Again, dividends are expected to remain at this new level indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 12.6 percent. Based on this information, should Nico make the change?
a. Yes
b. No
c. It’s irrelevant
d. Not enough information
11) At the quarterly meeting of Tangshan Mining Corporation, held on September 10th, the directors declared a $1.00 per share dividend for the firm’s 100,000 shares of common stock outstanding. The net effect of declaring and paying this dividend would be to
a. increase total assets by $100,000 and decrease stockholders equity by $100,000.
b. increase total assets by $100,000 and increase stockholders equity by $100,000.
c. decrease total assets by $100,000 and decrease stockholders equity by $100,000.
d. decrease total assets by $100,000 and increase stockholders equity by $100,000.
12) Tangshan Mining has common stock at par of $200,000, paid in capital in excess of par of $400,000, and retained earnings of $280,000. In states where the firm’s legal capital is defined as the par value of common stock, the firm could pay out ________ in cash dividends without impairing its capital.
a. $200,000
b. $880,000
c. $600,000
d. $680,000
13) A firm has current after-tax earnings of $1,000,000 and has declared a cash dividend of $400,000. The firm’s dividend payout ratio is
a. 4.0 percent.
b. 2.0 percent.
c. 2.5 percent.
d. 40 percent.
14) Mr. R. owns 20,000 shares of ABC Corporation stock. The company is planning to issue a stock dividend. Before the dividend Mr. R. owned 10 percent of the outstanding stock, which had a market value of $200,000, or $10 per share. Upon receiving the 10 percent stock dividend the value of his shares is
a. $210,000.
b. $200,000.
c. $220,000.
d. greater, but cannot be determined.
