Finance Questions

You are considering the purchase of one of two machines required in your production process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance costs. Machine B has an initial cost of $90. It requires $40 in maintenance costs for each year of its three-year life. Either machine must be replaced at the end of its life. Which is the better (i.e., lower cost) machine for the firm? The discount rate is 15 percent and the tax rate is zero

If firm U is unlevered and firm L is levered, then which of the following is true?I) VU = EU.II) VL = EL + DL.III) VL = EU + DL.A. I, II, and IIIB. III onlyC. I onlyD. I and II only

The following situations typically require that the financial manager value an entire business:I) If firm A is about make a takeover offer for firm B, then A's financial managers have to decide how much the combined business A + B is worth under A's management.II) If firm C is considering the sale of one of its divisions or a business line, it has to decide what the division or the business line is worth in order to negotiate with potential buyers.III) When a firm goes public, the investment bank must evaluate how much the firm is worth in order to set the price.A. I, II, and IIIB. I onlyC. I and II onlyD. III only

In general, which of the following statements is (are) true?I) Bonds issued in the United States are registered.II) Bonds issued in the United States are bearer bonds.III) Eurobonds are normally issued in a major currency, e.g., $US, euro, or yen.IV) Eurobonds are normally issued in the local currency.A. III onlyB. II onlyC. II and IV onlyD. I and III only

Acacia Corporation is expected to pay a dividend of $5 per share next year. Its expected EPS is $8.33. Assuming a cost of equity of 15% and dividend growth of 10%, what is the present value of growth opportunities embedded in Acacia's share price.

The opportunity cost of capital for a risky project is:A) the expected rate of return on a government security having the same maturity as the project.B) the expected rate of return on a well-diversified portfolio of common stocks.C) the expected rate of return on a security of similar risk as the project.D) the expected rate of return on a typical bond portfolio.

At the end of the first year of a project, net working capital stood at $100,000. In the second year of a project, inventories increased by $12,000, accounts payable increased by $2,000, and accounts receivable remained the same. During the third year of the project, inventories increased $14,000, accounts receivable decreased by $4,000, and accounts payables increased by $6,000. Calculate the net working capital at the end of the third year.

What is the "career limiting" error that Joanna makes in the Nike Case?9) CA) Uses a market risk premium based on the arithmetic instead of geometric mean. B) Uses Northpoint's cost of capital, instead of Nike's, when valuing the cash flows. C) Uses book value for the calculation of Nike's equity in her WACC calculation.D) Applies the wrong risk-free rate in her CAPM calculation.

Given corporate taxes, why does adding debt to the capital structure increase firm value?I) Extra cash flow goes to the firm's investors rather than the tax authorities.II) Earnings before interest and taxes are fully taxed at the corporate rate.III) Personal tax rates are the same as marginal corporate tax rates.A. I onlyB. III onlyC. II and III onlyD. II only

The equity book value of MB Corporation is $5 million, and the market value of itscommon stock is $20 million. The market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8 percent. If the Treasury bond rate is 5 percent, what is the company's cost of capital? (Assume no taxes.)A) 10%B) 13%C) 14.25% D) 15%

What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase instead of a cash dividend?A) Lower taxes, if capital gains tax rates are less than dividend tax ratesB) Higher taxes, if capital gains tax rates are less than dividend tax ratesC) Lower share priceD) A tax-free transaction

The growth rate in dividends is a function of two ratios. They areA) ROA and ROE.B) dividend yield and growth rate in stock price. C) ROE and the plowback ratio.D) book value per share and EPS.

Anubis Limited is expected to pay a dividend of $2 per share at the end of year 1(Div1), and the dividends are expected to grow at a constant rate of 4 percent forever. If the current price of the stock is $20 per share, calculate the expected return or the cost of equity capital for the firm.A) 10 percent B) 4 percent C) 14 percent D) 20 percent

Which of the following statements is FALSE?A. Across a longer time period, a single cash flow grows to a larger future valueB. For a higher interest rate, a single cash flow has a smaller present valueC. If its payments last longer, an annuity has a larger present valueD. For a higher interest rate, an annuity has a smaller future value

The following functions, provided by financial intermediaries, enable the smooth functioning of the economy:I) processing of payments;II) borrowing and lending;III) pooling risksA: I onlyB: I, II, and IIIC: III onlyD: I and II only

Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule:year 1: 20 percent;year 2: 32 percent;year 3: 19.2 percent;year 4: 11.5 percent;year 5: 11.5 percent; andyear 6: 5.8 percent.Calculate depreciation for year 2.A: $192,000B: $120,000C: $96,000D: $115,200

Given the following data for Project M calculate the NPV of the project.C0, C1, C2 Cash flow in real terms: −200, 150, 120 Real discount rate = 5% Nominal discount rate = 10%A: $45.21B: $70.00C: $51.70D: $35.54

Firms can repurchase shares in the following ways:I) open market repurchase;II) tender offer;III) Dutch auction;IV) direct negotiation with a major shareholderA: I, II, III, and IVB: III onlyC: I onlyD: II only

What is the net present value of the following cash flow sequence at a discount rate of 11 percent?t = 0 -120,000, t = 1, 300,000, t = 2 -100,000A: $231,432.51B: $69,108.03C: $80,000.00D: $88,000.00

An equity issue sold to the firm's existing stockholders is called aA: rights offer.B: private placement.C: general cash offer.D: discriminatory-price auction.