The Pennsylvania Railroad (PRR) currently has a levered capital structure, but it is considering a proposal to issue new equity (@$30/share) and use the proceeds to retire its debt. Selected financial information for PRR is provided in the table below. Assume that PRR generates perpetual annual EBIT at a constant level. Assume that all cash […]
Banks pay interest on amounts held in escrow accounts. Indicate whether the statement is true or false ANSWER FALSE
Gyrl Skateboards manufactures skateboard decks. Guy Gyrl, the CEO, is forecasting cash flows for the next few months. Forecasted sales are shown on the top row of the table. Forecasted cash inflows and outflows are also shown in the table. If Gyrl’s starts December with $50,000 of cash in the bank, then what will its […]
A firm is considering the following independent investments: Project Investment NPV PI F $50M $1.00M 1.02 G $80M $4.40M 1.06 H $60M $4.00M 1.07 I $70M ($3.00M) 0.96 J $40M $1.30M 1.03 In the absence of capital rationing, what is the total NPV of the projects that should be selected? Which projects should be selected […]
You invest $100 today in a two-year certificate of deposit that pays a 10% annual interest rate compounded annually. At maturity, your CD will give you $120. Indicate whether the statement is true or false ANSWER FALSE
A savings schedule with a zero ending balance means that A) annual deposits are sufficient to meet all goals. B) more savings are needed each year. C) the most desirable schedule has been determined. D) some goals will not be achieved. ANSWER A
Loans insured by the FHA are said to be “conventionally” financed. Indicate whether the statement is true or false ANSWER FALSE
The project cash flows and NPVs for Projects A and B are provided in the table below. Which project has a higher profitability index? Project A Project B Year 0 -$1,900 -$2,000 Year 1 $2,500 $1,550 Year 2 $1,500 $1,900 NPV $1,408.12 $784.50 A) Project A B) Project B C) The two projects have the […]
The cost of preferred stock is computed the same as: A) the pre-tax cost of debt. B) an annuity. C) the after-tax cost of debt. D) a perpetuity. E) an irregular growth common stock. ANSWER D
An annuity contract will pay you $4,000 a year (end of year) for the next three years. Or, you can choose to receive $12,610 at the end of the third. Assuming that you can earn 8% on investments, you should A) choose to receive the $4,000 annuity payments. B) choose to receive the $12,610 payment. […]
