Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s NPV?

QUESTION 1

1. Tuttle Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s projected NPV is negative, it should be rejected.

WACC: 11.00%        
Year 0 1 2 3 4
Cash flows −$1,000 $350 $350 $350 $350
$77.49
$81.56
$85.86
$90.15
$94.66

5 points   

QUESTION 2

1. Harry’s Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s projected NPV is negative, it should be rejected.

WACC: 10.25%          
Year 0 1 2 3 4 5
Cash flows −$1,000 $300 $300 $300 $300 $300
$105.89
$111.47
$117.33
$123.51
$130.01

5 points   

QUESTION 3

1. Warr Company is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s projected IRR can be less than the WACC or negative, in both cases it will be rejected.

Year 0 1 2 3 4
Cash flows −$1,050 $400 $400 $400 $400
14.05%
15.61%
17.34%
19.27%
21.20%

5 points   

QUESTION 4

1. Mansi Inc. is considering a project that has the following cash flow data. What is the project’s payback?

Year 0 1 2 3
Cash flows −$750 $300 $325 $350
1.91 years
2.12 years
2.36 years
2.59 years
2.85 years

5 points   

QUESTION 5

1. Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected.

WACC: 10.00%      
Year 0 1 2 3
Cash flows −$950 $500 $400 $300
$54.62
$57.49
$60.52
$63.54
$66.72

5 points   

QUESTION 6

1. Barry Company is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected.

WACC: 12.00%          
Year 0 1 2 3 4 5
Cash flows −$1,100 $400 $390 $380 $370 $360
$250.15
$277.94
$305.73
$336.31
$369.94

5 points   

QUESTION 7

1. Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC: 10.00%      
Year 0 1 2 3
Cash flows −$1,000 $450 $450 $450
  9.32%
10.35%
11.50%
12.78%
14.20%

5 points   

QUESTION 8

1. Malholtra Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC: 10.00%        
Year 0 1 2 3 4
Cash flows −$850 $300 $320 $340 $360
14.08%
15.65%
17.21%
18.94%
20.83%

5 points   

QUESTION 9

1. Fernando Designs is considering a project that has the following cash flow and WACC data. What is the project’s discounted payback?

WACC: 10.00%      
Year 0 1 2 3
Cash flows −$900 $500 $500 $500
1.88 years
2.09 years
2.29 years
2.52 years
2.78 years

5 points   

QUESTION 10

1. A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose?

WACC: 6.00%        
Year 0 1 2 3 4
CFS −$1,025 $380 $380 $380 $380
CFL −$2,150 $765 $765 $765 $765
$188.68
$198.61
$209.07
$219.52
$230.49

5 points   

QUESTION 11

1. TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project’s 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)

WACC 10.0%
Pre-tax cash flow reduction for other products (cannibalization) −$5,000
Investment cost (depreciable basis) $80,000
Straight-line depreciation rate 33.333%
Annual sales revenues $67,500
Annual operating costs (excl. depreciation) −$25,000
Tax rate 35.0%
$3,636
$3,828
$4,019
$4,220
$4,431

5 points   

QUESTION 12

1. Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project’s 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No change in net operating working capital would be required, and revenues and other operating costs would be constant over the project’s 3-year life. What is the project’s NPV? (Hint: Cash flows are constant in Years 1-3.)

WACC 10.0%
Opportunity cost $100,000
Net equipment cost (depreciable basis) $65,000
Straight-line depreciation rate for equipment 33.333%
Annual sales revenues $123,000
Annual operating costs (excl. depreciation) $25,000
Tax rate 35%
$10,521
$11,075
$11,658
$12,271
$12,885

5 points   

QUESTION 13

1. El Capitan Foods has a capital structure of 40% debt and 60% equity, its tax rate is 35%, and its beta (leveraged) is 1.25. Based on the Hamada equation, what would the firm’s beta be if it used no debt, i.e., what is its unlevered beta, bU?

0.71
0.75
0.79
0.83
0.87

5 points   

QUESTION 14

1. You plan to invest in one of two home delivery pizza companies, High and Low, that were recently founded and are about to commence operations. They are identical except for their use of debt (wd) and the interest rates on their debt⎯High uses more debt and thus must pay a higher interest rate. Based on the data given below, how much higher or lower will High’s expected EPS be versus that of Low, i.e., what is EPSHigh − EPSLow?

Applicable to Both Firms Firm High’s Data Firm Low’s Data
Capital $3,000,000 wd 70% wd 20%
EBIT $500,000 Shares 90,000 Shares 240,000
Tax rate 35% Int. rate 12% Int. rate 10%
$0.49
$0.54
$0.60
$0.66
$0.73

5 points   

QUESTION 15

1. Firm A is very aggressive in its use of debt to leverage up its earnings for common stockholders, whereas Firm NA is not aggressive and uses no debt. The two firms’ operations are identical⎯they have the same total investor-supplied capital, sales, operating costs, and EBIT. Thus, they differ only in their use of financial leverage (wd). Based on the following data, how much higher or lower is A’s ROE than that of NA, i.e., what is ROEA − ROENA?

Applicable to Both Firms Firm A’s Data Firm NA’s Data
Capital $150,000 wd 50% wd 0%
EBIT $40,000 Int. rate 12% Int. rate 10%
Tax rate 35%        
  8.60%
  9.06%
  9.53%
10.01%
10.51%

5 points   

QUESTION 16

1. If a firm borrows money, it is using financial leverage.

True

False

5 points   

QUESTION 17

1. Other things held constant, an increase in financial leverage will increase a firm’s market (or systematic) risk as measured by its beta coefficient.

True

False

5 points   

QUESTION 18

1. The graphical probability distribution of ROE for a firm that uses financial leverage would tend to be more peaked than the distribution if the firm used no leverage, other things held constant.

True

False

5 points   

QUESTION 19

1. Provided a firm does not use an extreme amount of debt, operating leverage typically affects only EPS, while financial leverage affects both EPS and EBIT.

True

False

5 points   

QUESTION 20

1. The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price.

True

False

5 points   

 

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