Question details

The market risk premium remains constant over time because the risk free
$ 15.00

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Financial Management

Question:

Q2. JPR 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?

Correct

Answer:

c. $15.5 million

Given

Answer:

d. $16.0 million

Question:

Q7. The market risk premium remains constant over time because the risk free

rate of return moves inversely with beta.

Correct

Answer:

b. False

Given

Answer:

a. True

Question:

Q18. Lithium, 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. Lithium, Inc.'s required rate of return for these projects is 10%.

The profitability index for Project A is

Correct

Answer:

a. 1.27.

Given

Answer:

b. 1.22.

Question:

Q21. Your company is considering the replacement of an old delivery van with

a new one that is more efficient. The old van cost $40,000 when it was

purchased 5 years ago. The old van is being depreciated using the simplified

straight-line method over a useful life of 8 years. The old van could be sold

today for $7,000. The new van has an invoice price of $80,000, and it will cost

$6,000 to modify the van to carry the company's products. Cost savings from

use of the new van are expected to be $28,000 per year for 5 years, at which

time the van will be sold for its estimated salvage value of $18,000. The new

van will be depreciated using the simplified straight-line method over its 5-

year useful life. The company's tax rate is 35%. Working capital is expected to

increase by $5,000 at the inception of the project, but this amount will be

recaptured at the end of year five. What is the incremental free cash flow for

year one?

Correct

Answer:

d. $24,220

Given

Answer:

c. $22,305

Question:

Q23. The recapture of net working capital at the end of a project will

Correct

Answer:

a. increase terminal year free cash flow.

Given

Answer:

c. increase terminal year free cash flow by the change in net working capital times the

corporate tax rate.

Question:

Q26. The less-risky investment is always the more desirable choice.

Correct

Answer:

b. False

 

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Given

Answer:

a. True

Question:

Q34. Raising funds internally is effectively increasing the investment of the

firm's existing common shareholders.

Correct

Answer:

a. True

Given

Answer:

b. False

Question:

Q39. Which of the following transactions will lower a company's financial

leverage?

Correct

Answer:

c. Common stock is sold and the proceeds are used to pay off existing short-term debt.

Given

Answer:

b. Preferred stock is sold and the proceeds are used to pay off existing short-term debt.

Question:

Q42. Concentric Corporation has 10 million shares of stock outstanding.

Concentric's after-tax profits are $140 million and the corporation's stock is

selling at a price-earnings multiple of 18, for a stock price of $252 per share.

Concentric's management issues a 40% stock dividend. What is the effect on an

investor who owns 100 shares of Concentric before the dividend if Concentric's

price-earnings multiple remains the same after the dividend is paid?

Correct

Answer:

a. The investor will own 140 shares worth $25,200.

Given

Answer:

b. The investor will own 140 shares worth $35,280.

Question:

Q43. As long as a firm has a positive level of retained earnings, it can pay a

dividend.

Correct

Answer:

b. False

Given

Answer:

a. True

Question:

Q45. The correct order of dividend process dates is

Correct

Answer:

d. declaration date, ex-dividend date, date of record, payment date.

Given

Answer:

b. declaration date, date of record, ex-dividend date, payment date.

Question:

Q46. Assume that the tax on dividends and the tax on capital gains is the

same. All else equal, what would a prudent investor prefer?

Correct

Answer:

c. The prudent investor would prefer capital gains?the capital gain tax liability can be

deferred until gains are realized.

Given

Answer:

b. The prudent investor would prefer dividends?a dollar today is always worth more than

a dollar to be received in the future.

Available solutions