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# work must be shown for all problems with the formulas with

work must be shown for all problems with the formulas with the calulation.

1) Johnson Junkyard Recyclers is considering a project with the following cash flows:
Initial outlay = \$13,000
Cash flows: Year 1 = \$5,000
Year 2 = \$3,000
Year 3 = \$9,000
If the appropriate discount rate is 15%, compute the NPV of this project.

a. \$4,000
b. -\$466
c. \$27,534
d. \$8,891

2) A project costs \$10,000 and is expected to return after-tax cash flows of \$3,000 each year for the next 10 years. This project’s payback period is:

a. three years.
b. three and one-third years.
c. four years.
d. 10 years.

3) A machine has a cost of \$5,375,000. It will produce cash inflows of \$1,825,000 (Year 1); \$1,775,000 (Year 2); \$1,630,000 (Year 3); \$1,585,000 (Year 4); and \$1,650,000 (Year 5). At a discount rate of 16.25%, what is the NPV?

a. \$81,724
b. \$257,106
c. \$416,912
d. \$190,939

4) You have been asked to analyze a capital investment proposal. The project’s cost is \$2,775,000. Cash inflows are projected to be \$925,000 in Year 1; \$1,000,000 in Year 2; \$1,000,000 in Year 3; \$1,000,000 in Year 4; and \$1,225,000 in Year 5. What is the project’s IRR?

a. 8.04%
b. 16.75%
c. 23.78%
d. 19.16%

5) Manheim Candles is considering a project with the following incremental cash flows. Assume a discount rate of 10%.
Year Cash Flow
0 (\$15,000)
1 \$10,000
2 \$20,000
3 \$30,000
Calculate the discounted payback period of the project.

a. 2.15 years
b. 2.36 years
c. 2.57 years
d. 2.78 years

6) Panhandle Faucets (PF) plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must PF earn on its investments if the value of the firm is to remain unchanged?

a. 18.0%
b. 13.0%
c. 10.0%
d. 14.2%

7) New Maverick Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm’s stock is 15% and its marginal tax rate is 40%, compute the firm’s cost of capital.

a. 13.5%
b. 12.5%
c. 7.2%
d. 11.1%

8) Your company is considering an investment in a project which would require an initial outlay of \$300,000 and produce expected cash flows in Years 1 through 5 of \$87,385 per year. You have determined that the current after-tax cost of the firm’s capital (required rate of return) for each source of financing is as follows:
Cost of debt 8%
Cost of preferred stock 12%
Cost of common stock 16%

Long-term debt currently makes up 20% of the capital structure,
preferred stock 10%, and common stock 70%. What is the net present
value of this project?

a. \$463
b. \$871
c. \$1,241
d. \$1,568

9) Given the following information on T & T, Inc. capital structure, compute the company’s weighted average cost of capital. The company’s marginal tax rate is 40%.
Type of Percent of Before-Tax
Capital Capital Structure Component Cost
Bonds 40% 7.5%
Preferred stock 5% 11%
Common stock (internal only) 55% 15%

a. 13.3%
b. 7.1%
c. 10.6%
d. 10.0%

10) Silver Dollar Inc. has \$2,575,000 of debt, \$550,000 of preferred stock, and \$18,125,000 of common equity. Silver Dollar’s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Silver Dollar’s weighted average cost of capital?

a. 12.78%
b. 10.84%
c. 8.32%
d. 6.56%

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