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Exam 15: Capital Budgeting

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Question 21

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Debt in the capital structure could be treated as if it were common equity in computing the weighted average cost of capital if the debt were

A) callable.
B) participating.
C) cumulative.
D) convertible.

E) A) and B)
F) C) and D)

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Question 22

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Does a project that generates a positive internal rate of return also have a positive net present value? Explain.

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No. A positive IRR does not necessarily ...

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Question 23

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The combined weighted average interest rate that a firm incurs on its long-term debt, preferred stock, and common stock is the

The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the

Rogers Corporation Rogers Corporation is considering an investment in a labor-saving machine. Information on this machine follows: Refer to Rogers Corporation. What is the internal rate of return on this project (round to the nearest 1/2%) ? Present value tables or a financial calculator are required.

A project under consideration by Hilton Corporation would require a working capital investment of $200,000. The working capital would be liquidated at the end of the project's 10-year life. If Hilton Corporation has an after-tax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is the present value of the working capital cash flow expected to be received in year 10? Present value tables or a financial calculator are required.

Income taxes are levied on

Steve Black has just turned 65. He has $100,000 to invest in a retirement annuity. One investment company has offered to pay Steve $10,000 per year for 15 years (payments to begin in one year) in exchange for an immediate $100,000 payment. If Steve accepts the offer from the investment company, what is his expected return on the $100,000 investment (assume a return that is compounded annually) ? Present value tables or a financial calculator are required.

Majestic Cruises Corporation Majestic Cruises Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $600,000 and would be fully depreciated by the straight-line method over 15 years. At the end of 15 years, the ship will have no value and will be scuttled. Majestic Cruises' cost of capital is 14 percent, and its marginal tax rate is 35 percent. Refer to Majestic Cruises Corporation. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.) Present value tables or a financial calculator are required.

The net present value method assumes that all cash inflows can be immediately reinvested at the

Royal Pacific Corporation Royal Pacific Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be scuttled. Royal Pacific's cost of capital is 12 percent, and its marginal tax rate is 40 percent. Refer to Royal Pacific Corporation. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.) Present value tables or a financial calculator are required.

Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years. In the formula X = $100,000/$40,000, X represents the

A project has an initial cost of $125,000 and generates a present value of net cash inflows of $150,000. What is the project's profitability index?

Royal Pacific Corporation Royal Pacific Corporation is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be scuttled. Royal Pacific's cost of capital is 12 percent, and its marginal tax rate is 40 percent. Refer to Royal Pacific Corporation. If the ship produces equal annual labor cost savings over its 10-year life, how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.) Present value tables or a financial calculator are required.

If the discount rate that is used to evaluate a project is equal to the project's internal rate of return, the project's ____ is zero.

The weighted average cost of capital approach to decision making is not directly affected by the

The pre-tax and after-tax cash flows would be the same for all of the following items except

As the marginal tax rate goes up, the benefit from the depreciation tax shield

A firm's discount rate is typically based on

Butler Company Butler Company is considering an investment in a machine that would reduce annual labor costs by $30,000. The machine has an expected life of 10 years with no salvage value. The machine would be depreciated according to the straight-line method over its useful life. The company's marginal tax rate is 30 percent. Refer to Butler Company. Assume that the company will invest in the machine if it generates an internal rate of return of 16 percent. What is the maximum amount the company can pay for the machine and still meet the internal rate of return criterion? Present value tables or a financial calculator are required.