The expected returns on the debt and equity of a levered firm are rE=15% and rD=7%, and the current market value of the debt and equity are E=66 and D=44, respectively. What is the firm’s weighted average cost of capital (WACC)? a. 7.8% b. 9.8% c. 11.8% d. 13.8% FORMULA: WACC=rD(D/V)+rLE(E/V) ANSWER C
Date: September 19th, 2020
When the Profitability Index (PI) is greater than 1, the benefits exceed the costs. Indicate whether the statement is true or false. ANSWER Answer: TRUE Explanation: Ranking projects by PI with different costs levels CAN STILL LEAD to selection problems.
Date: September 19th, 2020
Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars? A) Profitability Index Method B) Internal Rate of Return Method C) Net Present Value Method D) Discounted Payback Period Method ANSWER Answer: A
Date: September 19th, 2020
A firm is considering four projects with the following PIs, NPVs, and Costs. Project A: PI of 1.3, NPV of $3,600, and cost of $12,000; Project B: PI of 1.4, NPV of $5,600, and cost of $14,000; Project C: PI of 1.5, NPV of $5,000, and cost of $10,000; Project D: PI of 2.1, NPV […]
Date: September 19th, 2020
Wyatt and Zachary Enterprises (WZE) uses the Modified Internal Rate of Return (MIRR) when evaluating projects. WZE’s cost of capital is 9.75%. What is the MIRR of a project if the initial cost is $1,200,000 and the project will last seven years, with each year producing cash inflows of $290,000? Should WZE accept this project […]
Date: September 19th, 2020
The ________ method of capital budgeting is a ratio of the present value of cash inflows divided by the initial investment. A) payback period B) net present value C) internal rate of return D) profitability index ANSWER Answer: D
Date: September 19th, 2020
The probability that a firm will become bankrupt is largely dependent on its level of both business and financial risk. Indicate whether the statement is true or false ANSWER TRUE
Date: September 19th, 2020
Which of the following creates a secured short-term loan with accounts receivable? A) lines of credit B) commercial paper C) pledge of accounts receivable D) factoring of accounts receivable ANSWER C
Date: September 19th, 2020
Hollister, Inc. is currently considering an eight-year project that has an initial outlay or cost of $120,000. The future cash inflows from its project for years 1 through 8 are the same at $30,000. Hollister has a discount rate of 11%. Because of capital rationing (shortage of funds for financing), Hollister wants to compute the […]
Date: September 19th, 2020
Dakota, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from its project for years 1 through 8 are the same at $35,000. Dakota has a discount rate of 12%. Because there is a shortage of funds to finance all good projects, Dakota wants to […]
Date: September 19th, 2020
