Question 1 Multiple Choice, ,Problem 1,Big Bucks Mines is considering a project with start-up costs of $16 million, ,expected after tax cash flows of $2 million per year for 30 years, and a shut ,down cost of $45 million to be paid to a contractor at the start of year 31. ,BBM has a cost of capital (discount rate) of 9.5% (EAR).,For what range of IRR does the project have positive NPV?,Answer, a. 0.000% to 10.333% , b. 0.211% to 10.300% , c. 0.255% to 10.318% , d. 0.000% to 15.427% , e. 0.000% to 3.574% , f. 3.574% to 10.456% , g. All RRR greater than 0% , h. All RRR greater than 1% ,Question 2 Multiple Choice, ,Problem 1 Continued…,Is the project worthwhile for BBM? ,Answer, a. Yes , b. No , c. Insufficient Information 2,Question 3 Multiple Choice, ,Problem 1 Continued…,The government, annoyed by several mining companies going broke before paying the ,clean-up costs, introduced new legislation requiring new mines to pay an equal amount ,each year into a trust fund in order to fully fund the estimated clean-up costs. The trust ,fund pays a guaranteed rate of interest of 8% (EAR). ,What will be BBM’s annual payment? ,Answer, a. $0.397 Million , b. $1.5 Million , c. $0.472 Million , d. $0.514 Million , e. $0.433 Million , f. $0.431 Million , g. $0.365 Million , h. Insufficient information , i. $3.997 Million ,Question 4 Multiple Choice, ,Problem 1 Continued…,Given that the new legislation has been passed. What is the new NPV of BBM’s project?,Answer, a. -$0.587 Million , b. $0.0815 Million , c. -$0.237 Million , d. $0.713 Million , e. -$0.802 Million , f. -$0.741 Million , g. -$3.759 Million , h. $0.587 Million , i. -$35.639 Million , j. Insufficient information 3,Question 5 Multiple Choice, ,Problem 1 Continued…,If you have solved question 4 correctly, you will notice that the new regulation has lead ,to a decline in the NPV. Why has the NPV declined? ,Answer, a. Because the new legislation requires firms to invest in the trust fund ,at less than their cost of capital. , b. Because government interference is always bad. , c. Because the Cleanup exercise imposes costs (without conferring any ,benefits) on the firm. , d. Because firms don’t get any time value on the trust fund payments., e. Because the time values of the payments are now captured by the,trust fund. , f. Because BBM’s cost of capital is too high. , g. Insufficient information to answer this question. ,Question 6 Multiple Choice, ,Problem 2,Clean Air Inc. is considering two mutually exclusive projects. Project A requires a ,$15,000 machine tool (CCA class 8, 20%) and will increase Clean Air’s sales by $10,000 ,per year for 4 years. After 4 years the machine tool will have no salvage value. Project B ,requires machinery costing $30,000 (CCA class 8, 20%), and will increase sales by ,$17,500 per year for 7 years, with no salvage value. Both of these projects can be ,repeated indefinitely. Clean Air has a cost of capital (discount rate) of 12% (EAR) and a ,marginal tax rate of 33%. ,What are the present values of the CCA tax shields for project A? ,Answer a. $2,928.01 ,b. -$2,928.01 ,c. $3,000.00 ,d. $2,082.14 ,e. $1,027.36 ,f. $1,701.56 ,g. $3,549.11 ,h. $3,836.87 4,Question 7 Multiple Choice, ,Problem 2 Continued…,What are the present values of the CCA tax shields for project B? ,Answer, a. $5,856.03 , b. -$5,856.03 , c. $6,000.00 , d. $4,164.29 , e. $2,054.72 , f. $3,403.13 , g. $7,098.21 , h. $7,673.75 ,Question 8 Multiple Choice, ,Problem 2 Continued…,What is the NPV of the project A? ,Answer, a. $15,373.49 , b. -$2,048.73 , c. $32,422.23 , d. $2,422.23 , e. $8,350.24 , f. $11,380.94 , g. $8,808.22 , h. $8,278.25 ,Question 9 Multiple Choice, ,Problem 2 Continued…,What is the NPV of the project B? ,Answer, a. $29,366.07 , b. $49,865.74 , c. $2,211.72 , d. $77,654.02 , e. $17,654.02 , f. $29,510.05 , g. $38,056.88 , h. $27,565.43 5,Question 10 Multiple Choice, ,Problem 2 Continued…,What is the EAA (Equivalent Annual Annuity) of the project A? ,Note: The EAC calculation annualizes the total cost of a project over its life. The same ,type of calculation can be used to annualize any amount, such as a project’s NPV. In ,such cases, the amount is called an equivalent annual benefit (EAA). ,Answer a. $2,725.49 ,b. $5,061.48 ,c. $2,723.11 ,d. -$674.51 ,e. $10,674.51 ,f. $797.48 ,g. $2,749.18 ,h. $3,746.99 ,i. $2,899.96 ,Question 11 Multiple Choice, ,Problem 2 Continued…,What is the EAA of the project B? ,Answer, a. $6,434.63 , b. $10,926.47 , c. $484.63 , d. $17,015.37 , e. $6,439.93 , f. $6,466.18 , g. $8,338.94 , h. $6,040.07 , i. $4,195.15 ,Question 12 Multiple Choice, ,Problem 2 Continued…,Clean Air managers should choose ____________ ,Answer, a. Project A , b. Project B , c. Either of the two projects , d. None of the two projects , e. Insufficient information to answer this question 6,Question 13 Multiple Choice, ,Problem 3 ,Proctor and Pimple (PP) has 50,000 five-year 7.5% semi-annual coupon bonds with a yield-tomaturity of 8%, 1,000,000 shares of common stock, with ? = 1.125, priced at $50 per share, ,and 25,000 shares of 8.5% preferred stock, with face value equal to $100, priced at $90 per ,share. Your financial analysts report the effective annual yield on short-term government ,bonds as 4% and the expected return on the S&P/TSX Composite Index as 10%. The ,corporate tax rate is 40%.,You are investigating the feasibility of a new line of cosmetics for PP. The cosmetics ,business is a tricky one: the demand on these luxurious products is highly volatile. Your ,market analysts have conducted a consumer survey, which cost the firm $20,000, and forecast ,the demand for the new product line under high and low demand scenarios. The variable cost ,per product unit is $80, while total fixed costs are estimated as $100,000 per year. The ,following table summarizes the projected demand schedule:,Projected Sales (Units),Year High Demand Low Demand,1 10,000 7,500,2 12,000 8,000,3 12,000 8,000,4 11,000 5,000,5 10,000 5,000,Unit Price $120 $100,It costs $750,000 to buy the equipment necessary to begin production. The equipment falls in ,Class 10 for depreciation purposes, and the CCA rate is 30%. The equipment will eventually ,be worth $50,000 in five years, at which time, the product line will be abandoned (but you ,will continue to have Class 10 assets in other divisions). ,The project requires a $50,000 upfront investment in inventory. The management estimates ,that, at the end of each year, total inventory will be 10% of sales revenue (for that year), while ,accounts receivable will equal 5% of sales revenue, and accounts payable will equal 6.25% of ,variable costs.,What is the required rate of return for PP?,Answer,a) 0.0774,b) 0.0784 ,c) 0.0787,d) 0.0789,e) 0.09477,Question 14 Multiple Choice, ,Problem 3 (Continued) ,What is the NPV of the project in the high demand scenario?,Answer, a) $326,465.62 , b) $286,162.72 , c) $282,686.82 , d) $281,144.73 , e) $230,640.31 ,Question 15 Multiple Choice, ,Problem 3 (continued),What is the NPV of the project in the low demand scenario?,Answer, a) -$373,222.68 , b) -$429,734.84 , c) -$430,950.91 , d) -$431,490.28 , e) -$449,108.79 ,Question 16 Multiple Choice, ,Problem 3 (continued) ,Suppose that the firm has just approved the project. Assuming that the demand could ,be either ‘high’ or ‘low’ over the life of the project (i.e. there are two possible ,outcomes), the probability of the high demand scenario must at least be … ,Answer a) 0.9114 ,b) 0.6055 ,c) 0.6048 ,d) 0.6039 ,e) 0.6003 ,Question 17 Multiple Choice, ,Problem 4,The weighted average cost of capital for ACME Enterprises is 9%. The typical ,ACME bond pays semi-annual coupons at a rate of 10% and has a remaining maturity ,of ten years. The firm’s preferred stock has a par value of $100 and pays 5% dividend. ,The corporate tax rate (Tc) is 35%, while the effective annual yield on short-term ,government bonds and expected return on the market portfolio are 3% and 10%,,respectively. You are also given the following information about ACME’s capital ,structure:8,Source Securities Price Value w ,i R ,i,Debt 50,000 $62,500,000 0.45,Equity 1,000,000 $ 75.00,Preferred 25,000 0.01 0.09,What is the yield-to-maturity on ACME bonds?,Answer a) 9.00% ,b) 6.67% ,c) 6.55% ,d) 6.52% ,e) 3.28% ,Question 18 Multiple Choice 1 points , ,Problem 4 (continued),What is the beta of ACME stock?,Answer, a) 1.4132 , b) 1.2165 , c) 1.1354 , d) 0.9892 , e) 0.7948 , ,Question 19 Multiple Choice 1 points , ,Problem 4 (continued),What is the price of ACME preferred stock?,Answer, a) $105.00 , b) $100.00 , c) $95.00 , d) $91.74 , e) $55.56
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