Textbook: NEW Corporate Finance Online — Instant Access

Stanley Eakins

William McNally

ISBN-10: 0132830647 “c ISBN-13: 9780132830645

Must show all work for credit- except for Excel IRR problems or multiple choice, then no work necessary

1) The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4,
$35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10%.
What is the NPV for this investment and should the company accept the project? A sentence or 2 explaining Why/Why Not?

2) Two projects each require a current cash expenditure of $10,000. Project A will generate cash inflows of $2,000 per year for the next twelve years. Project
B is expected to return $6,000 in 1 year, $4,000 at the end of year 2, and $3,000 in 3 years. Which project should be selected if funds are
unavailable to finance both and capital costs are 6%?

3) What is the payback period for the Airbus A380 project? Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2008.
Assume that Airbus will produce 60 aircraft per year for five years. Each aircraft will be sold for $230M and total operating costs are
75% of revenues. (Hint: Not all the $230M per plane gets recorded as operating cash flows, what percent is?). Assume that revenues and costs occur at
year-end with the first revenues (and costs) occurring on Dec 31, 2009. Ignore taxes and assume that there are no terminal year cash flows. What is the payback period?

4) An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay a premium of $100 per year at the end of each year of the 20 years. Find the internal rate of return to the nearest whole percentage point.

5) A project costs $12,000 and has a discount rate of 15%. Calculate the profitability index of the project that has cash flows of
$2,500 in years 1 and 2, and $4000 in years 3 and 4. Also, should you accept the project? A sentence or two Why/why not?

6) 13) As a newly hired financial analyst, your first job at VersaLife Corporation is to calculate the company’s cost of capital. The present capital
structure, which is considered optimal, is as follows:

Market Value

Debt $80 million

Preferred Stock $10 million

Common Equity $110 million

If VersaLife Corporation issues new debt, then the bond market expects a yield of 7.5%. Preferred stock is trading for $96, has a $100 par value and pays an
annual dividend of 8% (the next dividend is due in one year). Common equity has a beta of 1.20, the market risk premium is 5%, and the risk-free rate is 3%. If
the firm’s tax rate is 40%, what is the weighted average cost of capital?

(No explanation/work necessary.)

7) Capital structure may be defined as

A) a collection of securities assembled by an investor.

B) a schedule of projects that have positive NPVs.

C) the use of bank loans by a firm.

D) the mix of debt and equity.

E) another term for the investment opportunities’ schedule.

8) The essence of Modigliani and Miller’s irrelevance theory is that

A) increasing operating leverage will maximize EPS.

B) shareholders prefer to invest in firms with a high degree of financial leverage.

C) altering a firm’s capital structure will increase its value.

D) utilizing more debt will increase a firm’s value.

E) the value of the firm will not be changed by how assets are distributed between bondholders and stockholders.

9) What is the optimal capital structure?

A) The capital structure that frees up the most cash flow

B) The capital structure that makes management the most money

C) The capital structure that produces the highest firm value

D) The capital structure that keeps the most control within the company

10) Which of the following statements is true?

A) When choosing a target capital structure, the goal is to increase the degree of operating leverage.

B) A firm’s degree of operating leverage has no impact on how much debt it uses.

C) A firm’s decision to use more debt can affect its cost of equity.

D) Total leverage can be calculated by adding the degrees of financial and operating leverage together.

E) All firms in an industry often have similar capital structures.

Who is paid last in the event of bankruptcy?

A) Shareholders

B) Secured Bond Holders

C) Banks

D) Debenture Holders

E) Suppliers