# BUS 401 Week 3 Quiz Version c

In this work of BUS 401 Week 3 Quiz Version c you will find the next information:

1. The simulation approach provides us with (Points : 1)

2. Asian Trading Company paid a dividend yesterday of \$5 per share (D0 = \$4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company’s stock today is \$29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal \$2.50 per share. Asian Trading Company’s marginal tax rate is 35%. Based on the above information, the cost of retained earnings is (Points : 1)

3. Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier’s yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier’s common stock, what is the firm’s weighted average cost of capital? (Points : 1)

4. Nickel Industries is considering the purchase of a new machine that will cost \$178,000, plus an additional \$12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of \$85,000 per year and is expected to increase operating costs by \$10,000 annually. Nickel’s income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? (Points : 1)

5. A company has preferred stock that can be sold for \$21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of \$100. Flotation costs associated with the sale of preferred stock equal \$1.25 per share. The company’s marginal tax rate is 35%. Therefore, the cost of preferred stock is: (Points : 1)

6. 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)

7. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs \$95,000 and is expected to generate \$65,000 in year one and \$75,000 in year two. Project B costs \$120,000 and is expected to generate \$64,000 in year one, \$67,000 in year two, \$56,000 in year three, and \$45,000 in year four. Zellars, Inc.’s required rate of return for these projects is 10%. The net present value for Project B is (Points : 1)

8. A new machine can be purchased for \$1,200,000. It will cost \$35,000 to ship and \$15,000 to modify the machine. A \$12,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for \$180,000. The firm will borrow \$750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate \$350,000. What is the investment cost of the machine for capital budgeting purposes? (Points : 1)

9. Rent-to-Own Equipment Co. is considering a new inventory system that will cost \$750,000. The system is expected to generate positive cash flows over the next four years in the amounts of \$350,000 in year one, \$325,000 in year two, \$150,000 in year three, and \$180,000 in year four. Rent-to-Own’s required rate of return is 8%. What is the net present value of this project? (Points : 1)

10. PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for \$50,000 nine years ago and has a current book value of \$5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs \$100,000. It will cost the company \$10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for \$2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by \$8,000 per year while operating expenses are expected to decrease by \$12,000 per year. PDF’s marginal tax rate is 40%. Additional working capital of \$3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for \$5,000 at the end of the project’s ten-year life. What is the project’s terminal cash flow? (Points : 1)

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