Expert answer:Need Help with 13 questions about Financial Mgmt 3
Answer & Explanation:13. A capital budgeting project has a net present value of $30,000 and a modified internal rate ofreturn of 15%. The project’s required rate of return is 13%. The internal rate of return is:a. greater than $30,000b. greater than 15%c. between 13% and 15%d. less than 13%14. A new project is expected to generate $800,000 in revenues, $250,000 in cash operatingexpenses, and depreciation expense of $150,000 in each year of its 10-year life. Thecorporation’s tax rate is 35%. The project will require an increase in net working capital of$85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is thefree cash flow from the project in year one?a. $410,000b. $375,000c. $380,000d. $298,00015. A local restaurant owner is considering expanding into another rural area. The expansionproject will be financed through a line of credit with City Bank. The administrative costs ofobtaining the line of credit are $500, and the interest payments are expected to be $1,000per month. The new restaurant will occupy an existing building that can be rented for $2,500per month. The incremental cash flows for the new restaurant include:a. $2,500 per month rentb. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rentc. $1,000 per month interest payments, $2,500 per month rentd. $500 administrative costs, $2,500 per month rent16. Which of the following should be included in the initial outlay?a. increased investment in inventory and accounts receivableb. preexisting firm overhead reallocated to the new projectc. first year depreciation expense on any new equipment purchasedd. taxable gain on the sale of old equipment being replaced17. QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe waspurchased for $50,000 nine years ago and has a current book value of $5,000. (The oldmachine is being depreciated on a straight-line basis over a ten-year useful life.) The newmachine costs $100,000. It will cost the company $10,000 to get the new lathe to the factoryand get it installed. The old machine will be sold as scrap metal for $2,000. The new machineis also being depreciated on a straight-line basis over ten years. Sales are expected to increaseby $8,000 per year while operating expenses are expected to decrease by $12,000 per year.QRW’s marginal tax rate is 40%. Additional working capital of $3,000 is required to maintainthe new machine and higher sales level. The new lathe is expected to be sold for $5,000 atthe end of the project’s ten-year life. What is the incremental free cash flow during year 1 ofthe project?a. $11,400b. $15,200c. $12,800d. $14,40018. The cost of retained earnings is less than the cost of new common stock because:a. dividends are not tax deductibleb. flotation costs are incurred when new stock is issuedc. accounting rules allow a deduction when using retained earningsd. marginal tax brackets increase19. Beauty Inc. plans to maintain its optimal capital structure of 40 percent debt, 10 percentpreferred stock, and 50 percent common equity indefinitely. The required return on eachcomponent source of capital is as follows: debt–8 percent; preferred stock–12 percent;common equity–16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate ofreturn must the firm earn on its investments if the value of the firm is to remain unchanged?a. 12.00 percentb. 11.12 percentc. 12.40 percentd. 10.64 percent20. Your firm is considering an investment that will cost $920,000 today. The investment willproduce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 inyear 5. The discount rate that your firm uses for projects of this type is 11.25%. What is theinvestment’s internal rate of return?a. 15.98%b. 27.28%c. 20.53%d. 21.26%21. The advantages of NPV are all of the following EXCEPT:a. it provides the amount by which positive NPV projects will increase the value of the firmb. it allows the comparison of benefits and costs in a logical manner through the use of timevalue of money principlesc. it recognizes the timing of the benefits resulting from the projectd. it can be used as a rough screening device to eliminate those projects whose returns donot materialize until later years22. Which of the following are included in the terminal cash flow?a. recapture of any working capital increase included in the initial outlayb. the expected salvage value of the assetc. any tax payments or receipts associated with the salvage value of the assetd. all of the above23. Which of the following differentiates the cost of retained earnings from the cost of newlyissued common stock?a. the larger dividends paid to the new common stockholdersb. the flotation costs incurred when issuing new securitiesc. the cost of the pre-emptive rights held by existing shareholdersd. the greater marginal tax rate faced by the now-larger firm24. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000and 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 inyear three, and $45,000 in year four. Lithium, Inc.’s required rate of return for these projectsis 10%. The profitability index for Project B is:a. 1.55b. 1.39c. 1.33d. 1.4825. When terminating a project for capital budgeting purposes, the working capital outlay requiredat the initiation of the project will:a. increase the cash flow because it is recapturedb. decrease the cash flow because it is an outlayc. not affect the cash flowd. decrease the cash flow because it is a historical cost
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