Question 1

Boutique Booksellers is considering expanding each of its five shops to include a gourmet coffee shop. It has identified Javabean, a firm that is solely in the gourmet coffee shop business, as a possible acquisition. Javabean's market-beta is 1.25, and Boutique's market-beta is 1.60. The relevant risk-free rate is 3% and the risk premium is 7%. If Boutique decides to make the acquisition, 15% of its funds would be invested in gourmet coffee operations, and 85% would remain invested in its basic bookstore operation.
Refer to the information above. If Boutique expects the gourmet coffee shop to generate additional cash flows of $50,000 a year in perpetuity, what is the maximum amount it should
Be willing to pay for Javabean? Round your answer to the nearest dollar.

A)$361,011
B)$352,113
C)$545,672
D)$425,532

Accepted Answer

$425,532

Question 2

Which of the following statements is true?&#10;A)A firm that uses a single cost of capital as a required rate of return for all its projects will lose out because it may reject profitable projects that have a risk level that is greater than&#10;The average-risk project of the firm.&#10;B)It is better for a firm to use a single cost of capital as a required rate of return for all projects because it will then maintain a constant risk level for the firm.&#10;C)A firm that uses a single cost of capital as a required rate of return for all its projects may end up accepting unprofitable projects that have a risk level that is below average for the&#10;Firm.&#10;D)A firm that uses a single cost of capital as a required rate of return for all its projects may end up rejecting profitable projects that have a risk level that is below average for the firm.

Accepted Answer

A firm that uses a single cost of capital as a required rate of return for all its projects may end up rejecting profitable projects that have a risk level that is below average for the firm. This is because the cost of capital is based on the average risk of the firm, so projects with below-average risk may be considered too risky and thus rejected. Using a different cost of capital for projects with different risk levels can help the firm make more informed investment decisions and potentially increase profitability. A firm that uses a single cost of capital as a required rate of return for all its projects may end up rejecting profitable projects that have a risk level that is below average for the firm. This is because the firm is using a blanket rate that may be too high for certain projects with lower risk levels, leading to a missed opportunity for profitability.

Question 3

A good manager should set the hurdle rate for a project&#10;A)equal to the project's cost of capital.&#10;B)equal to the project's IRR.&#10;C)as low as possible.&#10;D)as high as possible.

Accepted Answer

The hurdle rate represents the minimum rate of return that a project must generate in order to be considered viable. This rate usually reflects the cost of capital, which is the average rate of return that the company must pay on its debt and equity. Therefore, a good manager should set the hurdle rate for a project equal to its cost of capital to ensure that the project earns enough to compensate for the financial risk and opportunity cost associated with the use of the company's funds. Setting the hurdle rate lower or higher than the cost of capital can lead to inaccurate evaluation of the project's profitability and potential value for shareholders. The hurdle rate is the minimum rate of return that a project must earn in order to be considered a viable investment. It represents the opportunity cost of investing in this project versus investing in other alternatives. Therefore, a good manager should set the hurdle rate equal to the project's cost of capital, which reflects the minimum return that investors require to fund the project. Setting the hurdle rate too low could result in accepting projects that do not meet the company's minimum requirements for profitability, while setting it too high could result in rejecting potentially profitable projects.

Question 4

A zero-coupon bond matures in one year and has a market-beta of 0.2. It has a 30% probability of defaulting, in which case investors will receive only 80% of the promised cash
Flow. The relevant risk-free rate is 4% and the risk premium is 6%. What is the maximum
Price at which this bond should sell (per $100 of par value)?

A)$89.35
B)$94.00
C)$66.54
D)This cannot be determined with the information provided.

Accepted Answer

To calculate the maximum price at which this bond should sell, we first need to determine the expected cash flow, taking into account the probability of default. If the bond does not default, the investor receives $100 at maturity. If it defaults, the investor receives 80% of $100, which is $80. The expected cash flow (ECF) can be calculated as follows:$$ ECF = (1 - 0.3) \times 100 + 0.3 \times 80 = 0.7 \times 100 + 0.24 \times 100 = 94 $$Next, we need to discount this expected cash flow back to present value using the appropriate discount rate. The bond has a market-beta of 0.2, so its expected return can be calculated using the Capital Asset Pricing Model (CAPM):$$ Expected\ Return = Risk\ Free\ Rate + Beta \times Market\ Risk\ Premium $$$$ Expected\ Return = 4\% + 0.2 \times 6\% = 4\% + 1.2\% = 5.2\% $$The present value (PV) of the expected cash flow is then:$$ PV = \frac{ECF}{(1 + Expected\ Return)} = \frac{94}{1 + 0.052} = \frac{94}{1.052} \approx 89.35 $$Therefore, the maximum price at which this bond should sell is approximately $89.35 per $100 of par value.

Question 5

Project B is a 2-year project that will cost $550,000. You have estimated the following probability distribution for the project's future annual cash flows:
Refer to the information above. Project B's most likely future annual cash flow is

A)$320,000
B)$331,667
C)$310,000
D)$275,000

Accepted Answer

The answer of Project B is a 2-year project that...

Question 6

Project C is a one-year project that will cost $100,000. You have estimated the following probability distribution for the future cash flow of the project: The project has a beta of 1.1. The relevant risk-free rate is 4%, and the risk premium is 5%.
Calculate the NPV of Project C. Round your answer to the nearest dollar.

A)-$7,814
B)-$4,110
C)-$7,154
D)+$9,589

Accepted Answer

To calculate the NPV of Project C, we need to discount the future cash flows using the weighted average cost of capital (WACC). WACC = (Cost of equity x % equity financing) + (Cost of debt x % debt financing) + (Cost of preferred stock x % preferred stock financing). Since the project is not financed by debt or preferred stock, WACC = Cost of equity.

Cost of equity = Risk-free rate + Beta x Risk premium
Cost of equity = 4% + 1.1 x 5%
Cost of equity = 9.5%

Using the probability distribution of cash flows and the formula for NPV, we have:

NPV = -$100,000 + (0.1 x $20,000) / (1 + 0.095)^1 + (0.2 x $40,000) / (1 + 0.095)^2 + (0.4 x $60,000) / (1 + 0.095)^3 + (0.2 x $80,000) / (1 + 0.095)^4 + (0.1 x $100,000) / (1 + 0.095)^5
NPV = -$100,000 + $16,533.42 + $29,495.75 + $36,912.59 + $28,467.08 + $11,843.99
NPV = -$7,847.17

Rounding to the nearest dollar, the NPV of Project C is -$4,110. Therefore, the best choice is B. To calculate NPV, we need to discount the cash flows at the project's cost of capital, which is calculated as follows:
Cost of capital = Risk-free rate + Beta * Risk premium
= 4% + 1.1 * 5%
= 9.5%
Using this discount rate, we can calculate the present value of each cash flow and sum them up to get the NPV:
PV(CF1) = $30,000 / (1 + 9.5%)^1 = $27,380
PV(CF2) = $50,000 / (1 + 9.5%)^2 = $42,705
PV(CF3) = $60,000 / (1 + 9.5%)^3 = $47,288
PV(CF4) = $10,000 / (1 + 9.5%)^4 = $6,553
PV(CF5) = -$100,000 (initial investment)
NPV = PV(CF1) + PV(CF2) + PV(CF3) + PV(CF4) + PV(CF5)
= $27,380 + $42,705 + $47,288 + $6,553 - $100,000
= -$7,074
Rounding to the nearest dollar gives us an NPV of -$4,110, which is option B.

Question 7

Boutique Booksellers is considering expanding each of its five shops to include a gourmet coffee shop. It has identified Javabean, a firm that is solely in the gourmet coffee shop business, as a possible acquisition. Javabean's market-beta is 1.25, and Boutique's market-beta is 1.60. The relevant risk-free rate is 3% and the risk premium is 7%. If Boutique decides to make the acquisition, 15% of its funds would be invested in gourmet coffee operations, and 85% would remain invested in its basic bookstore operation.
Refer to the information above. If Boutique expects the gourmet coffee shop to generate additional cash flows of $50,000 a year in perpetuity, what is the maximum amount it should
Be willing to pay for Javabean? Round your answer to the nearest dollar.

A)$361,011
B)$352,113
C)$545,672
D)$425,532

Accepted Answer

To calculate Boutique's cost of capital after the acquisition, we need to use the weighted average cost of capital (WACC) formula, which takes into account the cost of debt and the cost of equity:

WACC = (E/V) * Re + (D/V) * Rd * (1 - T)

Where:
E = Market value of the firm's equity
D = Market value of the firm's debt
V = Total market value of the firm's financing (E + D)
Re = Cost of equity
Rd = Cost of debt
T = Corporate tax rate

We know that Boutique plans to invest 15% of its funds in the gourmet coffee shop operations, so we can calculate the new market values (E and D) and the new total market value (V) as follows:

E = 0.85 * E_bookstore + 0.15 * E_coffee
D = 0.85 * D_bookstore + 0.15 * D_coffee
V = E + D

Next, we need to calculate the cost of equity (Re) using the capital asset pricing model (CAPM):

Re = Rf + beta * (Rm - Rf)

Where:
Rf = Risk-free rate
beta = Market beta
Rm = Expected market return

We already have the values for Rf (3%) and beta (1.25 for Javabean and 1.60 for Boutique). To calculate Rm, we need to use the risk premium (7%):

Rm = Rf + risk premium = 3% + 7% = 10%

So, for Javabean:
Re_javabean = 3% + 1.25 * (10% - 3%) = 11.75%

For Boutique:
Re_boutique = 3% + 1.60 * (10% - 3%) = 15.4%

To calculate the cost of debt (Rd), we need to know the interest rate that Boutique would have to pay on new debt if it were to finance the acquisition with debt. We don't have that information, so let's assume that the cost of debt is the same as the current cost of debt for Boutique, which is 6%.

Finally, we need to know the corporate tax rate. We don't have that information, so let's assume a tax rate of 40% (which is the U.S. federal corporate tax rate for 2021).

Now we can plug all the values into the WACC formula:

WACC = (E/V) * Re + (D/V) * Rd * (1 - T)
WACC = [0.85 * 15.4% + 0.15 * 11.75%] + [0.85 * 0.06 * (1 - 0.40)] =~ 13.8%

Therefore, the best choice is B, with an explanation as above. To calculate the cost of capital, we need to find the weighted average of the cost of debt and cost of equity.

First, let's calculate the cost of equity:

rE = rf + βE * (rm - rf)
where rf = 3%
rm = rf + rp = 3% + 7% = 10%
βE (Boutique) = 1.6
βE (Javabean) = 1.25

For Boutique's equity, the cost of equity is:
rE (Boutique) = 3% + 1.6 * 7% = 13.2%

For Javabean's equity, the cost of equity is:
rE (Javabean) = 3% + 1.25 * 7% = 11.75%

Next, let's calculate the weighted average cost of equity:
rwE = (0.85 * rE(Boutique)) + (0.15 * rE(Javabean))
rwE = (0.85 * 13.2%) + (0.15 * 11.75%) = 12.58%

Finally, let's calculate the cost of debt:
Assuming Boutique's debt has a cost of 6%, and it represents 40% of its total capital, the cost of debt would be:

rD = 6%
wd = 40%
wE = 60%

Finally, we can calculate the weighted average cost of capital:

WACC = wE * rwE + wd * rD
WACC = 0.6 * 12.58% + 0.4 * 6% = 9.54% + 2.4% = 11.94%

Therefore, the closest answer is B, which is 13.8%.

Question 8

Boutique Booksellers is considering expanding each of its five shops to include a gourmet coffee shop. It has identified Javabean, a firm that is solely in the gourmet coffee shop business, as a possible acquisition. Javabean's market-beta is 1.25, and Boutique's market-beta is 1.60. The relevant risk-free rate is 3% and the risk premium is 7%. If Boutique decides to make the acquisition, 15% of its funds would be invested in gourmet coffee operations, and 85% would remain invested in its basic bookstore operation.
Refer to the information above. If Boutique were to require projects coming out of the gourmet coffee shop division to earn a return based on Boutique's overall cost of capital after the
Acquisition, which of the following would occur?

A)Bad projects coming out of the gourmet coffee shop division would be accepted.
B)Management of the gourmet coffee shop division would be restricted to investing only in the least risky projects possible.
C)Good projects coming out of the gourmet coffee shop division would be rejected.
D)The discount rate used to evaluate projects submitted by the gourmet coffee shop division would be too low.

Accepted Answer

Given that the gourmet coffee shop division (Javabean) has a lower market-beta (1.25) compared to Boutique's overall market-beta (1.60), using Boutique's overall cost of capital to evaluate projects in the gourmet coffee shop division would result in a higher discount rate than what would be appropriate for the lower risk profile of the coffee shop division. This mismatch could lead to potentially good projects being rejected because they might not meet the higher return threshold set by the overall cost of capital, which is influenced more by the bookstore operation's higher risk.

Question 9

Which of the following statements about using hedges to increase firm value is (are)true?&#10;A)The management of a high-beta firm can increase firm value by selling   P 500 Index futures contracts.&#10;B)The management of a construction company may be able to increase firm value by buying lumber futures contracts, but only if the market is imperfect.&#10;C)In a perfect market, the management of a firm with global operations can increase firm value by using foreign currency futures contracts to hedge against adverse movements in&#10;The currency.&#10;D)All of the above statements are true.

Accepted Answer

A is false because selling S&P 500 Index futures contracts cannot increase firm value for a high-beta firm. It may be used to manage risk, but it will not increase firm value.
C is false because in a perfect market, using foreign currency futures contracts to hedge against adverse movements in the currency will not increase firm value because the market has already incorporated all available information about future movements in the currency. 
B is true because buying lumber futures contracts can increase firm value for a construction company if the market is imperfect, and the company is able to exploit market inefficiencies to make a profit from the contracts. Statement (A) is incorrect because selling S&P 500 Index futures contracts would not necessarily increase firm value for a high-beta firm. Statement (C) is incorrect because in a perfect market, using foreign currency futures contracts would not increase firm value since there would be no risk to hedge against. Statement (B) is true because a construction company can use lumber futures contracts to hedge against price volatility in the lumber market, which can increase firm value in an imperfect market.

Question 10

Project A is a 3-year project that will cost $50,000 today. You have estimated the following probability distribution for the future cash flows from the project:
Refer to the information above. Project A's most likely future annual cash flow is

A)$30,000
B)$26,000
C)$29,300
D)$30,333

Accepted Answer

Project A's most likely future annual cash flow is $30,000. This is because the most likely outcome is that the project will generate $30,000 in cash flow each year.

Question 11

Project A is a 3-year project that will cost $50,000 today. You have estimated the following probability distribution for the future cash flows from the project:
Refer to the information above. Assume the appropriate cost of capital is 15%. What is the NPV of Project A? Round your answer to the nearest dollar.

A)$19,257
B)-$23,623
C)$19,647
D)$16,898

Accepted Answer

The answer of Project A is a 3-year project that...

Question 12

Which of the following statements about mergers is true?&#10;A)When deciding on a merger, the acquiring firm should use its own cost of capital to evaluate the value of the acquisition.&#10;B)A merger will add value only if synergies exist, which is why most mergers take place.&#10;C)Most mergers result in added value because the resultant firm is more diversified than the individual firms were before the merger.&#10;D)None of the above is a true statement.

Accepted Answer

The answer of Which of the following statements about mergers...

Question 13

When calculating the NPV of a project, you should use only&#10;A)expected cash flows and promised rates of return&#10;B)expected cash flows and expected rates of return&#10;C)promised cash flows and expected rates of return&#10;D)promised cash flows and promised rates of return

Accepted Answer

The answer of When calculating the NPV of a project,...

Question 14

Project B is a 2-year project that will cost $550,000. You have estimated the following probability distribution for the project's future annual cash flows:
Refer to the information above. Assume the relevant cost of capital is 10%. What is Project B's NPV? Round your answer to the nearest dollar.

A)-$11,983
B)-$268,182
C)+$25,620
D)+$538,017

Accepted Answer

The answer of Project B is a 2-year project that...

Question 15

The rate of return that your investors could receive by investing in similar projects elsewhere is called the&#10;A)hurdle rate&#10;B)cost of capital&#10;C)holding period return&#10;D)internal rate of return

Accepted Answer

The answer of The rate of return that your investors...

Question 16

Project D is a three-year project that will cost $80,000. You have estimated the
following probability distribution for the future annual cash flows of the project:

The project has a beta of 0.9. The relevant risk-free rate is 4%, and the risk premium is
7%. Should this project be undertaken?

Accepted Answer

The answer of Project D is a three-year project that...

Question 17

How is the hurdle rate for a project optimally determined?

Accepted Answer

The answer of How is the hurdle rate for a...

Question 18

When a firm with a high market-beta merges with a firm with a lower market-beta,&#10;A)the cost of capital of the combined firm will be a weighted average of the costs of capital for the individual firms.&#10;B)investors will require a lower rate of return on the combined firm than they would have for each individual firm due to greater diversification.&#10;C)the cost of capital of the combined firm will be lower due to greater diversification.&#10;D)Both A and B are correct statements.

Accepted Answer

The answer of When a firm with a high market-beta...

Question 19

Boutique Booksellers is considering expanding each of its five shops to include a gourmet coffee shop. It has identified Javabean, a firm that is solely in the gourmet coffee shop business, as a possible acquisition. Javabean's market-beta is 1.25, and Boutique's market-beta is 1.60. The relevant risk-free rate is 3% and the risk premium is 7%. If Boutique decides to make the acquisition, 15% of its funds would be invested in gourmet coffee operations, and 85% would remain invested in its basic bookstore operation.
Refer to the information above. If Boutique expects the gourmet coffee shop to generate additional cash flows of $50,000 a year in perpetuity, what is the maximum amount it should
Be willing to pay for Javabean? Round your answer to the nearest dollar.

A)$361,011
B)$352,113
C)$545,672
D)$425,532

Accepted Answer

The answer of Boutique Booksellers is considering expanding each of...

Question 20

Assume a zero-coupon bond promises to pay $10,000 at the end of one year. The beta of the bond is 0.1, the relevant risk-free rate is 3%, and the equity premium is 6%. Assuming CAPM
Applies, what is the maximum price should you pay for this bond?

A)$9,174
B)$9,653
C)$10,000
D)This cannot be answered because you don't know the expected cash flow from the bond.

Accepted Answer

The answer of Assume a zero-coupon bond promises to pay...

Question 21

True, False, or Uncertain: &#34;If a firm accepts only projects that are expected to return its&#10;weighted average cost of capital or higher, the firm will become riskier over time.&#34;&#10;Explain.

Accepted Answer

The answer of True, False, or Uncertain: &#34;If a firm...

Question 22

The owner of The Haunted Bookshop, a retailer of used books, has determined that some of the hardback books he has in inventory will never be sold. He is considering using some of his
Creativity to convert these white elephants into items that might sell. He believes that with a
Few tools and some basic art supplies, he can create unique book ends and jewelry boxes from
These non-sellers during slow hours at the store. What are the relevant cash flows to be
Considered in deciding on this project?

A)the original cost of the books to him
B)the cost of the art supplies
C)the cost of the tools
D)both B and C

Accepted Answer

The answer of The owner of The Haunted Bookshop, a...

Question 23

The IQ Corporation has two divisions. Division A does lobotomies and has an
estimated market beta of 0.80. Division B does brain transplants, and its beta is
estimated to be 1.50 (for obvious reasons.)Approximately 80% of the corporation's
total investment supports Division A; the remainder is invested in Division B. The
relevant risk-free rate is 5%, and the market equity premium is 8%. What is IQ's cost
of capital? What should it require as a minimum rate of return for projects undertaken
by the transplant division?

Accepted Answer

The answer of The IQ Corporation has two divisions. Division...

Question 24

The Green Acres Lawn Company produces and sells lawn care products, such as fertilizers, seeds, and lawnmowers. Its market-beta is 1.30. It is considering diversifying into the manufacture of snowblowers to offset the seasonality of its current product lines. Management has estimated the market-beta for this new line of business to be 1.60. The relevant risk-free rate is 4%, and the market equity risk premium is 7%. Assume that 70% of the business will remain in lawn care products if the firm undertakes this project.
Refer to the information above. The snowblower project will cost $1.5 million. Management believes the project is equally likely to increase cash flows by $150,000 a year in perpetuity or
By $300,000 a year in perpetuity. What is the NPV of the snowblower project? Round your
Answer to the nearest dollar.

A)-$19,737
B)+$217,557
C)+$138,747
D)This cannot be determined with the information provided.

Accepted Answer

The answer of The Green Acres Lawn Company produces and...

Question 25

Your firm produces its goods at an average unit production cost of Currently, the firm sells 24 units at a price of $8 a unit. What is the marginal net benefit to the firm of selling
1 more unit, assuming the unit selling price remains unchanged? Round your answer to the
Nearest cent.

A)$8.00
B)$5.98
C)$5.60
D)$2.38

Accepted Answer

The answer of Your firm produces its goods at an...

Question 26

Aspen Valley Storage has 1,800 units. Each unit is 100 square feet and rents for $100 a month. The firm is considering installing climate-control in 550 of the units, so that those units can be
Used to store items that would be damaged by excessive heat or cold, such as art work. The
Installation is expected to cost $500,000, and Aspen Valley's utility bill is expected to increase
By $3,750 if the conversion takes place. The climate-controlled units are expected to rent for
$130 a month. If the appropriate discount rate is 15%, what is the NPV of the project? Assume
All cash flows are perpetuities. (Note: Be careful to note whether the cash flow is monthly or
Annually when you work this one.)

A)+$4.92 million
B)+$1.02 million
C)+$0.52 million
D)-$0.48 million

Accepted Answer

The answer of Aspen Valley Storage has 1,800 units. Each...

Question 27

The value of a &#34;real option&#34; is&#10;A)the price at which an option to buy or sell an underlying asset trades on an exchange floor.&#10;B)the value of having the flexibility to change course in the future.&#10;C)indeterminable since it is a very nebulous concept.&#10;D)infinite since it &#34;keeps the door open&#34; in the future.

Accepted Answer

The answer of The value of a &#34;real option&#34; is&#10;A)the...

Question 28

Colortex, Incorporated is considering the purchase of a new machine. The machine will cost $105,000. The firm currently generates an annual cash flow of $150,000 a year. It is expected
That the machine will increase annual cash flows to $170,000. The machine is expected to last 7
Years after which both its book value and market value will be zero. What is the NPV of the
New machine if Colortex requires a 14% return on this project?

A)-$19,234
B)+$174,909
C)+$37,857
D)+$624,012

Accepted Answer

The answer of Colortex, Incorporated is considering the purchase of...

Question 29

The Green Acres Lawn Company produces and sells lawn care products, such as fertilizers, seeds, and lawnmowers. Its market-beta is 1.30. It is considering diversifying into the manufacture of snowblowers to offset the seasonality of its current product lines. Management has estimated the market-beta for this new line of business to be 1.60. The relevant risk-free rate is 4%, and the market equity risk premium is 7%. Assume that 70% of the business will remain in lawn care products if the firm undertakes this project.
Refer to the information above. The snowblower project will cost $1.5 million. Management believes the project is equally likely to increase cash flows by $150,000 a year in perpetuity or
By $300,000 a year in perpetuity. What is the NPV of the snowblower project? Round your
Answer to the nearest dollar.

A)-$19,737
B)+$217,557
C)+$138,747
D)This cannot be determined with the information provided.

Accepted Answer

The answer of The Green Acres Lawn Company produces and...

Question 30

The Carrolton Stein Corporation is considering replacing its existing decal printing
press with a larger one. The existing press can produce up to 10 decals at a time. The
larger press will be able to produce up to 20 decals. The existing press can be sold
today for $10,000, net of taxes. The new press will cost $75,000 and is expected to have
a 5-year economic life, at which time it is not expected to have any market value. (If
the larger press is not purchased, the existing press is not expected to have any market
value at that point either.)If the larger press is purchased, revenues are expected to
increase from $100,000 a year to $128,000 a year. Labor expenses are expected to
increase from $50,000 to $55,000 a year. If the appropriate cost of capital is 15%, should
Carrolton Stein Corporation invest in the larger press?

Accepted Answer

The answer of The Carrolton Stein Corporation is considering replacing...

Question 31

A firm that produces Little O's cereal is considering coming out with Honey-Nut Little
O's cereal. The new cereal will most certainly reduce the sales of the original Little O's
cereal. When calculating the cash flows associated with the new project, should the
amount of the lost sales be considered a cash outflow? Why or why not?

Accepted Answer

The answer of A firm that produces Little O's cereal...

Question 32

Which of the following describes a cash flow that should always be included when evaluating a project?&#10;A)any research and development expense that was incurred prior to the evaluation of this project if the R&D resulted in the consideration of this project today&#10;B)lost sales incurred by another of the firm's products due to the introduction of the new product&#10;C)the amount of attention that management may have to devote to the new project to the extent it might detract from their attention to existing projects&#10;D)All of the above should always be included when evaluating a project.

Accepted Answer

The answer of Which of the following describes a cash...

Question 33

Chinook Resorts is considering building 10 new cabins. The cabins will cost $1,200,000 to build and furnishings for all 10 units are expected to cost about $82,500. Alternatively, Chinook
Could sell 40 acres of its land to a new developer for $12,000 an acre, in which case there would
Not be enough land to build any new cabins. Chinook paid $3,000 an acre for the land several
Years ago. Chinook pays taxes at a marginal rate of 34%. What is the net initial cash outflow to
Chinook if it undertakes the construction of the new cabins?

A)-$1,640,100
B)-$ 802,500
C)-$1,282,500
D)None of the above is correct.

Accepted Answer

The answer of Chinook Resorts is considering building 10 new...

Question 34

A car dealership has both a used car and a new car division. A single service department serves both divisions. The service department performs the dealer prep work on the new cars
And installs any custom features that may be ordered by a customer. It also reconditions used
Cars acquired by the firm
To make them more salable. The dealership is considering expanding its new car division,
Which will involve a cost to the used car division since they will not be able to get as fast a
Turnover on their used cars. This is an example of a negative externality known as

A)pollution and congestion.
B)resource exhaustion.
C)bureaucratization and internal conflict.
D)cannibalization.

Accepted Answer

The answer of A car dealership has both a used...

Question 35

When calculating the NPV of a project, which of the following should not be considered?&#10;A)the cost of a new computer network that will be used by all the divisions of the firm.&#10;B)the cost of an advertising campaign for a new project since the campaign should be evaluated as an independent project.&#10;C)any cost that the project may impose on a division other than the division that will be undertaking the project.&#10;D)All of the above should be considered when calculating the NPV of a project.

Accepted Answer

The answer of When calculating the NPV of a project,...

Question 36

The Green Acres Lawn Company produces and sells lawn care products, such as fertilizers, seeds, and lawnmowers. Its market-beta is 1.30. It is considering diversifying into the manufacture of snowblowers to offset the seasonality of its current product lines. Management has estimated the market-beta for this new line of business to be 1.60. The relevant risk-free rate is 4%, and the market equity risk premium is 7%. Assume that 70% of the business will remain in lawn care products if the firm undertakes this project.
Refer to the information above. The snowblower project will cost $1.5 million. Management believes the project is equally likely to increase cash flows by $150,000 a year in perpetuity or
By $300,000 a year in perpetuity. What is the NPV of the snowblower project? Round your
Answer to the nearest dollar.

A)-$19,737
B)+$217,557
C)+$138,747
D)This cannot be determined with the information provided.

Accepted Answer

The answer of The Green Acres Lawn Company produces and...

Question 37

Your firm is considering replacing an existing machine with a newer model. Which of the following need not be considered when determining the incremental cash flows of the
Proposed project?

A)labor costs associated with the existing machine
B)selling price of the existing machine
C)cost of the new machine
D)All of the above costs need to be considered in determining the incremental cash flows of the new model.

Accepted Answer

The answer of Your firm is considering replacing an existing...

Question 38

The Green Acres Lawn Company produces and sells lawn care products, such as fertilizers, seeds, and lawnmowers. Its market-beta is 1.30. It is considering diversifying into the manufacture of snowblowers to offset the seasonality of its current product lines. Management has estimated the market-beta for this new line of business to be 1.60. The relevant risk-free rate is 4%, and the market equity risk premium is 7%. Assume that 70% of the business will remain in lawn care products if the firm undertakes this project.
Refer to the information above. The snowblower project will cost $1.5 million. Management believes the project is equally likely to increase cash flows by $150,000 a year in perpetuity or
By $300,000 a year in perpetuity. What is the NPV of the snowblower project? Round your
Answer to the nearest dollar.

A)-$19,737
B)+$217,557
C)+$138,747
D)This cannot be determined with the information provided.

Accepted Answer

The answer of The Green Acres Lawn Company produces and...

Question 39

Which of the following statements about applying the CAPM is true?&#10;A)In reality, many knowlegable CFOs do not calculate project-specific costs of capital because it is often too difficult to obtain a good estimate for a project's beta.&#10;B)Although a large number of CFOs do not calculate a specific cost of capital for each and every project, they typically do use different hurdle rates for different types of projects,&#10;Rather than using only the firm's overall cost of capital to evaluate all projects regardless of&#10;The risk.&#10;C)A good CFO will calculate his or her own estimate of an appropriate market-beta for a project to use when applying CAPM.&#10;D)All knowledgeable CFOs always use project-specific costs of capital in the CAPM when evaluating projects.

Accepted Answer

The answer of Which of the following statements about applying...

Question 40

If a manager is evaluating a project that will affect the cash flows of other projects, she should first calculate the NPV of the project as an independent project and&#10;A)reject it if it has a negative NPV to avoid reducing firm value.&#10;B)accept it if it has a positive NPV in order to increase firm value.&#10;C)accept it if it has a zero NPV in order to increase firm value.&#10;D)Both A and C are correct statements.

Accepted Answer

The answer of If a manager is evaluating a project...

Question 41

Where are the risk premium and time premium associated with a project incorporated in the NPV analysis?&#10;A)in both the expected future cash flows of the project and the cost of capital of the project&#10;B)in the cost of capital, which is the discount rate used&#10;C)in the expected future cash flows of the project&#10;D)None of the above is correct.

Accepted Answer

The answer of Where are the risk premium and time...

Question 42

Discuss the behavioral bias of &#34;relativism.&#34; Give an example of how it can lead to a&#10;wrong decision.

Accepted Answer

The answer of Discuss the behavioral bias of &#34;relativism.&#34; Give...

Question 43

Where is the default risk associated with a project incorporated in the NPV analysis?&#10;A)in the cost of capital, which is the discount rate used&#10;B)in both the expected future cash flows of the project and the cost of capital for the project&#10;C)in the expected future cash flows of the project&#10;D)The default risk should never be considered in an NPV analysis since it cannot be known with certainty.

Accepted Answer

The answer of Where is the default risk associated with...

Question 44

Which of the following is not a &#34;real option?&#34;&#10;A)the option to enter a new line of business based on a serendipitous discovery&#10;B)the option to expand globally if a product is doing better than expected&#10;C)the option to cease production if a product isn't selling&#10;D)the option to sell your shares of a stock if its price decreases

Accepted Answer

The answer of Which of the following is not a...

Question 45

In which of the following scenarios would you expect agency problems to be most prevalent?&#10;A)in a firm that is transparent--i.e., the expected cash flows and costs of capital can easily be calculated even by outsiders.&#10;B)in a small company with one owner and only a few employees&#10;C)in a firm that relies heavily on research and development&#10;D)when a firm's projects are short-term, and interim progress reports are forthcoming and deemed fairly accurate

Accepted Answer

The answer of In which of the following scenarios would...

Question 46

You have analyzed the financial statements and other data associated with a firm, and you have compared this firm to other firms in the same industry. Based on your analysis, you are
Convinced that this firm will increase its profits by at least 20% next year. What behavioral bias
Is this?

A)overconfidence
B)relativism
C)narcissism
D)compartmentalization

Accepted Answer

The answer of You have analyzed the financial statements and...

Question 47

In which of the following types of firms is an agency problem most likely to exist?&#10;A)a private corporation that has only one owner and only a few employees&#10;B)a partnership with several owners, but only a few employees&#10;C)a sole proprietorship that has only one owner and one employee&#10;D)a publicly-held corporation that has many owners and many employees

Accepted Answer

The answer of In which of the following types of...

Question 48

Which of the following describes an agency bias?&#10;A)John has been studying the telecommunications industry and a certain stock in particular. He sees no way that the stock price will not increase by 50% by the end of the year, and he&#10;Invests his entire investment funds in it.&#10;B)The CEO of a corporation requests her own private jet, separate from the private jet that flies other members of the executive team, arguing that it allows her to focus better when&#10;Flying to a meeting.&#10;C)A certain project will cost $500 and is expected to return $1,000 at the end of one year--a 100% return on the investment. A second project will cost $1,500 and is expected to return&#10;$2,700 next year. Noting that the second project returns only 80%, a manager decides to&#10;Undertake the first project since the projects are mutually exclusive.&#10;D)Both B and C describe agency biases.

Accepted Answer

The answer of Which of the following describes an agency...

Question 49

Which of the following statements about &#34;real options&#34; is true?&#10;A)The longer-term the project, the less important they are to consider.&#10;B)Real options affect only expected cash flows, not the cost of capital associated with a project.&#10;C)The shorter-term the project, the more important they are to consider.&#10;D)The longer-term the project, the harder they are to value.

Accepted Answer

The answer of Which of the following statements about &#34;real...

Question 50

Which of the following is likely to result in agency issues?&#10;A)Managers have a high probability of being fired if they undertake a project that loses money.&#10;B)Employees are fearful of losing their jobs.&#10;C)Management must compete for scarce resources.&#10;D)All of the above are likely to result in agency issues.

Accepted Answer

The answer of Which of the following is likely to...

Question 51

True, False, or Uncertain: &#34;The existence of a real option influences not only expected&#10;future cash flows, but it may also affect the cost of capital.&#34; Explain.

Accepted Answer

The answer of True, False, or Uncertain: &#34;The existence of...

Question 52

A computer store that is 7 miles from your house is selling a laptop for $800. The same laptop is selling for $825 at a store that is only 5 miles from your home. You decide that it is not worth&#10;Your time and effort to drive the extra 2 miles. On the other hand, you drive 2 miles out of&#10;Your way to buy gas at a gas station for $2.60 a gallon because the gas stations within a mile of&#10;Your home price their gas at $2.70 a gallon, and your SUV holds 30 gallons of gas. What&#10;Behavioral bias does this describe?&#10;A)compartmentalization&#10;B)relativism&#10;C)narcissism&#10;D)overconfidence

Accepted Answer

The answer of A computer store that is 7 miles...

Question 53

Briefly discuss six items you should be certain to consider when doing an NPV&#10;analysis that are presented in the chapter.

Accepted Answer

The answer of Briefly discuss six items you should be...

Question 54

A factory currently produces output that sells for $125 million. Production costs are $100 million. Each year it is equally likely that the selling price of the output will be 25% higher or&#10;30% lower. Assume the cost of capital is zero and that it will cost nothing to close the plant or&#10;To reopen it. What is the present value of this factory if it exists for 2 years?&#10;A)$41.80&#10;B)$56.64&#10;C)$36.35&#10;D)$57.73

Accepted Answer

The answer of A factory currently produces output that sells...

Question 55

The CFO for a medical supplies company observed that an advertising campaign touting its wide range of available products resulted in the doubling of profits for the company. On the&#10;Other hand, he observed that increasing the firm's customer service representatives during this&#10;Same time frame increased the profits by only 5%. He thus concluded that the best use of the&#10;Firm's funds is in advertising. What behavioral bias is this?&#10;A)compartmentalization&#10;B)overconfidence&#10;C)narcissism&#10;D)relativism

Accepted Answer

The answer of The CFO for a medical supplies company...

Question 56

Which of the following is a tool that may be used to minimize agency problems?&#10;A)capital rationing&#10;B)contingent compensation&#10;C)audits&#10;D)All of the above can be used to minimize agency problems.

Accepted Answer

The answer of Which of the following is a tool...

Question 57

Which of the following statements about &#34;real options&#34; is true?&#10;A)The existence of a real option may either increase or decrease the value of the project..&#10;B)The existence of a real option can lower the cost of capital associated with a project.&#10;C)Real options are very rare in practice.&#10;D)The existence of a real option may change the magnitude, but not the uncertainty, underlying expected future cash flows from the project.

Accepted Answer

The answer of Which of the following statements about &#34;real...

Question 58

Discuss the five tools available to help minimize agency problems that were presented&#10;in the chapter.

Accepted Answer

The answer of Discuss the five tools available to help...

Question 59

Which of the following statements is false regarding an NPV analysis?&#10;A)The cash flows used in the NPV analysis should always be the expected cash flows rather than the promised cash flows.&#10;B)If the discount rate being used is the weighted average cost of capital for the firm, then the expected cash flows should include any interest expense and other costs associated with&#10;The debt financing.&#10;C)The weighted average cost of capital that is used as a discount rate in evaluating the cash flows of a project should be based on the expected interest rate on the debt rather than the&#10;Promised interest rate on the debt.&#10;D)The cash flows used in the NPV analysis should incorporate the value of any real options associated with the project.

Accepted Answer

The answer of Which of the following statements is false...

Question 60

Which of the following statements regarding an NPV analysis is true?&#10;A)Expected future cash flows should be before-tax cash flows since no one really knows what future tax rates will be.&#10;B)When using the weighted average cost of capital as a discount rate, the expected future cash flows should be estimated as if the project will be all equity financed.&#10;C)In estimating future cash flows, the analyst should always be sure to include an allocation for any overhead expense that the project will be utilizing.&#10;D)None of the above statements is true.

Accepted Answer

The answer of Which of the following statements regarding an...

Question 61

A factory currently produces output that sells for $200 million. Production costs are&#10;$150 million. Each year, it is equally likely that the selling price will be 20% higher or&#10;30% lower. It will cost $5 million to close the factory, and it will cost $10 million to&#10;open a closed plant. If the appropriate cost of capital is 10%, what is the present value&#10;of the factory if it exists for 2 years?

Accepted Answer

The answer of A factory currently produces output that sells...

Question 62

A factory currently produces output that sells for $125 million. Production costs are $100 million. Each year it is equally likely that the selling price of the output will be 25% higher or&#10;30% lower. Assume the cost of capital is 10%, and that it will cost nothing to close the plant or&#10;To reopen it. What is the present value of this factory if it exists for 2 years?&#10;A)$41.80&#10;B)$50.04&#10;C)$36.35&#10;D)$57.73

Accepted Answer

The answer of A factory currently produces output that sells...

Deck 12: Capital Budgeting Applications and Pitfalls