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# 1. J.B. Enterprises purchased a new molding machine for \$85,000.

1. J.B. Enterprises purchased a new molding machine for \$85,000. The company paid \$8,000 for shipping and another \$7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for \$4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. What will depreciation expense be during the first year? (Points : 1)
\$13,000
\$12,500
\$11,625
\$11,500

2. Higgins Office Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component 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 of return must Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged? (Points : 1)
12.40 percent
12.00 percent
11.12 percent
10.64 percent

3. Jones Distributing Corp. can sell common stock for \$27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to \$2.70 per share. What is the cost of capital for Jones Distributing if the corporation raises money by selling common stock? (Points : 1)
27.00%
18.89%
18.33%
17.00%

4. Nickel Industries is considering the purchase of a new machine that will cost \$178,000, plus an additional \$12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of \$85,000 per year and is expected to increase operating costs by \$10,000 annually. Nickel's income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? (Points : 1)
\$54,800
\$60,200
\$66,350
\$68,200

5. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs \$95,000 and 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 in year three, and \$45,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The internal rate of return for Project A is (Points : 1)
31.43%.
29.42%.
25.88%.
19.45%.

6. A project for Jevon and Aaron, Inc. results in additional accounts receivable of \$400,000, additional inventory of \$180,000, and additional accounts payable of \$70,000. What is the additional investment in net working capital? (Points : 1)
\$580,000
\$510,000
\$270,000
\$150,000

7. Clanton Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn \$30 million in net income next year and retain 40% of it, how large can the capital budget be before common stock must be sold? (Points : 1)
\$7.5 million
\$12.0 million
\$15.5 million
\$16.0 million

8. The risk free rate of return is 2.5% and the market risk premium is 8%. Penn Trucking has a beta of 2.2 and a standard deviation of returns of 28%. Penn Trucking's marginal tax rate is 35%. Analysts expect Penn Trucking's dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Penn Trucking's cost of retained earnings? (Points : 1)
16.4%
17.7%
19.6%
20.1%

9. Project XYZ requires an investment in equipment of \$600,000 to replace existing equipment. The existing equipment will produce after-tax salvage value of \$70,000. Net working capital requirements are increased by \$50,000. What is the total cash outflow at time zero? (Points : 1)
\$720,000
\$650,000
\$530,000
\$580,000

10. Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier's yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier's common stock, what is the firm's weighted average cost of capital? (Points : 1)
7.20%
10.80%
12.00%
12.25%
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