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Find the interest rate on a loan charging $912 simple interest on a principal of $4750 after 6 years.

 

Find the principal of a loan at 6.2% if the simple interest after 5 years 6 months is $2387.

How much should be invested now at 5.5% simple interest if $8769 is needed in 2 years?

 

Determine the amount due on the compound interest loan. (Round your answers to the nearest cent.) $19,000 at 4% for 15 years if the interest is compounded in the following ways.

Calculate the present value of the compound interest loan. (Round your answers to the nearest cent.) $25,000 after 8 years at 5% if the interest is compounded in the following ways.

 

Find the term of the compound interest loan. (Round your answer to two decimal places.)

Use the “rule of 72” to estimate the doubling time (in years) for the interest rate, and then calculate it exactly. (Round your answers to two decimal places.) 9% compounded annually.

 

Use the “rule of 72” to estimate the doubling time (in years) for the interest rate, and then calculate it exactly. (Round your answers to two decimal places.) 7.5% compounded weekly.

Find the effective rate of the compound interest rate or investment. (Round your answer to two decimal places.) 13% compounded monthly. [Note: This rate is a typical credit card interest rate, often stated as 1.1% per month.]

 

Find the effective rate of the compound interest rate or investment. (Round your answer to two decimal places.) A $80,000 zero-coupon bond maturing in 9 years and selling now for $42,035.

 

You have just received $175,000 from the estate of a long-lost rich uncle. If you invest all your inheritance in a tax-free bond fund earning 6.3% compounded quarterly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.)

You have just won $140,000 from a lottery. If you invest all this amount in a tax-free money market fund earning 6% compounded weekly, how long do you have to wait to become a millionaire? (Round your answer to two decimal places.)

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. Find the accumulated amount of the annuity. (Round your answer to the nearest cent.) $4500 annually at 6% for 10 years.

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. Find the accumulated amount of the annuity. (Round your answer to the nearest cent.) $1000 monthly at 6.1% for 20 years.

 

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. Find the required payment for the sinking fund. (Round your answer to the nearest cent.) Monthly deposits earning 4% to accumulate $8000 after 10 years.

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. Find the required payment for the sinking fund. (Round your answer to the nearest cent.) Yearly deposits earning 12.1% to accumulate $7500 after 12 years.

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. Find the amount of time needed for the sinking fund to reach the given accumulated amount. (Round your answer to two decimal places.) $285 monthly at 5.6% to accumulate $25,000.

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. An individual retirement account, or IRA, earns tax-deferred interest and allows the owner to invest up to $5000 each year. Joe and Jill both will make IRA deposits for 30 years (from age 35 to 65) into stock mutual funds yielding 9.8%. Joe deposits $5000 once each year, while Jill has $96.15 (which is 5000/52) withheld from her weekly paycheck and deposited automatically. How much will each have at age 65? (Round your answer to the nearest cent.)

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. How much must you invest each month in a mutual fund yielding 11.9% compounded monthly to become a millionaire in 10 years? (Round your answer to the nearest cent.)

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. The Oseola McCarty Scholarship Fund at the University of Southern Mississippi was established by a $170,000 gift from an 87-year-old woman who had dropped out of sixth grade and worked for most of her life as a washerwoman. How much would she have had to save each week in a bank account earning 3.5% compounded weekly to have $170,000 after 75 years? (Round your answer to the nearest cent.)

 

In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. You and your new spouse each bring home $1600 each month after taxes and other payroll deductions. By living frugally, you intend to live on just one paycheck and save the other in a mutual fund yielding 7.78% compounded monthly. How long will it take to have enough for a 20% down payment on a $175,000 condo in the city? (Round your answer to two decimal places.)

 

Calculate the present value of the annuity. (Round your answer to the nearest cent.) $1700 monthly at 6.4% for 30 years.

 

 

Determine the payment to amortize the debt. (Round your answer to the nearest cent.) Monthly payments on $170,000 at 4% for 25 years.

 

Determine the payment to amortize the debt. (Round your answer to the nearest cent.) Quarterly payments on $15,500 at 3.7% for 6 years.

 

Find the unpaid balance on the debt. (Round your answer to the nearest cent.) After 6 years of monthly payments on $180,000 at 3% for 25 years.

 

The super prize in a contest is $10 million. This prize will be paid out in equal yearly payments over the next 10 years. If the prize money is guaranteed by AAA bonds yielding 5% and is placed into an escrow account when the contest is announced 1 year before the first payment, how much do the contest sponsors have to deposit in the escrow account? (Round your answer to the nearest cent.)

 

Just before his first attempt at bungee jumping, John decides to buy a life insurance policy. His annual income at age 30 is $35,000, so he figures he should get enough insurance to provide his wife and new baby with that amount each year for the next 35 years. If the long-term interest rate is 6.4%, what is the present value of John’s future annual earnings?

A MasterCard statement shows a balance of $580 at 13.5% compounded monthly. What monthly payment will pay off this debt in 1 year 10 months? (Round your answer to the nearest cent.)

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1. A $1,000 bond quoted at 96.5 would sell for:

 

a. $1,000

b. $965

c. $96.50

d. None of the above

 

2. A $1,000 bond quoted at 104 would sell for:

 

a. $1,104

b. $1,000

c. $104

d. $1,040

 

3. Bonds payable issued with collateral are called:

 

a. debenture bonds

b. serial bonds

c. callable bonds

d. secured bonds

 

4. Bonds that are backed soely by the general credit of the corporation issuing them are called:

 

a. callable bonds.

b. debenture bonds.

c. indenture bonds.

d. convertible bonds.

 

5. For a corporation, a premium on bonds results when:

 

a. the contract rate is greater than the market rate.

b. the contract rate is less than the market rate.

c. the face value is greater than the effective rate.

d. None of the above.

 

6. When the market rate of interest on bonds is higher than the contract rate, the bonds will sell at:

 

a. a premium

b. their face value

c. their maturity value

d. a discount

 

7. A bond payable is similar to which of the following?

 

a. Accounts Payable

b. Accounts Receivable

c. Notes Payable

d. Cash

 

8. If bonds are sold between interest payment dates, the amount of cash the issuer receives is:

 

a. more than the market value of the bonds.

b. less than the market value of the bonds.

c. equal to the market value of the bonds.

d. equal to the face value of the bonds.

 

9. If a bonds is issued at a premium, the effective interest rate is most likely _________ the contract interest rate.

 

a. higher than

b. lower than

c. the same as

d. Answer cannot be determined based on information given.

 

10. A bond is issued for less than its face value. Which of the following statements most likely would explain why?

 

a. The bond’s contract rate is lower than the market rate at the time of issue.

b. The bond’s contract rate is the same as the market rate at the time of the issue.

c. The bond’s contract rate is higher than the market rate at the time of the issue.

d. The bonds is not secured by specific assets of the corporation.

 

11. When a bond issued at face value is retired, the journal entry is:

 

a. debit Bond Interest Expense; credit Cash

b. debit Bonds Payable; credit Cash

c. debit Cash; credit Bonds Payable

d. debit Cash; credit Bond Interest Expense

 

12. Assume the following account balances immediately after an interest payment date:

 

Bonds Payable                  $100,000

Premium on Bonds

Payable                            5,000

 

 

If bonds are retired immediately at a total cost of $104,000, the journal entry to record this event is:

 

a. Cash                                       104,000

Loss on Bond Retirement         1,000

Premium on Bonds Payable      5,000

Bonds Payable                         100,000

 

b. Bonds Payable                        100,000

Premium on Bonds Payable      5,000

Cash                                       104,000

Gain on Bond Retirement         1,000

 

c. Bonds Payable                        100,000

Loss on Bond Retirement         9,000

Premium on Bonds Payable      5,000

Cash                                       104,000

 

d. None of the above

 

13. A fund set up so that a bond can be retired at maturity is called a:

 

a. sinking fund

b. bond payable fund

c. stock fund

d. retirement fund

 

14. The interest rate specified in the bond indenture is called the:

 

a. market rate.

b. discount rate.

c. contract rate.

d. effective rate.

 

15. On April 1, Braintree Corporation issued 10%, ten-year, $300,000 bonds at 106. The effective interest rate for these bonds is:

 

a. 10%

b. 9.43%

c. 4.7%

d. 5%

 

16. On April 1, Braintree Corporation issued 10%, ten-year, $300,000 bonds at face value. Interest dates are April 1 and October 1. The amount of cash paid out for interest during the current calendar year is:

 

a. $0.

b. $15,000

c. $30,000

d. $31,000

 

17. The entry to record the issuance of a bond between interest payment dates will include a:

 

a. debit to Cash; credit to Bonds Payable; credit to Bonds Interest Payable.

b. debit to Bonds Payable; credit to Cash.

c. debit to Bond Interest Expense; credit to Bond Interest Payable.

d. debit to Bond Interest Payable; credit to Bond Interest Expense.

 

18. Martin Corporation sells $200,000, 12%, ten-year bonds at face value on January 1. Interest is paid on January 1 and July 1. The entry to record the issuance of the bonds on January 1 is:

 

a. Cash                   200,000

Bonds Payable    200,000

 

b. Cash                   200,000

Interest Payable 24,000

Bonds Payable    176,000

 

c. Cash                   176,000

Interest Expense 24,000

Bonds Payable    200,000

 

d. Cash                   188,000

Interest Expense           12,000

Bonds Payable    200,000

 

19. The sale and issuance of $400,000, 8% bonds with a market rate of 8% would involving debiting Cash for:

 

a. $432,000

b. $400,000

c. $368,000

d. $32,000

 

20. Miranda Corporation issued $200,000 of 12%, ten-year bonds for $220,000. The entry to record the issuance of the bonds includes a:

 

a. debit to Bonds Payable for $200,000.

b. credit to Premium on Bonds Payable for $20,000.

c. credit to Bonds Payable for $220,000.

d. credit to Cash for $220,000.

 

21. The records of Ashley Boutique showed Net Loss, $30,000; Depreciation Expense, $25,000; and increase in Supplies on Hand, $5,000. The net cash flow from operating activities using the indirect method is:

 

a. $15,000.

b. $20,000.

c. ($10,000).

d. (15,000).

 

22. Management has authorized the purchase of a large quantity of inventory for early December. The purchase will have credit terms of 2/10, n/30, and they will authorize payment by the discount date. How will this decision affect the period’s cash flows from operations! indirect method?

 

a. It will increase this period’s cash flows from operations.

b. It will decrease this period’s cash flows from operations.

c. It will not affect this period’s cash flows from operations.

d. This does not affect cash flows from operations.

 

23. Depreciation on factory equipment would be reported in the statement of cash flows prepared by indirect method in:

 

a. the operating activities section.

b. the financing activities section.

c. the investing activities section.

d. None of the above.

 

24. The balance of Supplies has decreased during the year. How would this event affect the statement of cash flows operations section indirect method?

 

a. It is already included in the net income.

b. It would affect the operations section positively.

c. It would affect the operations section negatively.

d. Does not affect the cash flow form operations.

 

25. Cost of merchandise sold for the year was $850,000. Inventories were $60,000 and $90,000 at the beginning and end of the year, respectively. There were no changes in accounts payable from the beginning to the end of the year. Cash payment for merchandise to be reported on the cash flow statement using the direct method is:

 

a. $850,000

b. $910,000

c. $940,000

d. $880,000

 

26. Operating expenses other than depreciation for the year were $400,000. Accrued expenses payable increased by $35,000. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

 

a. $400,000

b. $435,000

c. $365,000

d. $35,000

 

27. Operating expenses other than depreciating for the year were $335,000. Prepaid expenses decreased by $7,000. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

 

a. $335,000

b. $342,000

c. $328,000

d. $7,000

 

28. When using the direct method to determine the net cash flows from operating activities, major categories would NOT include:

 

a. cash received from customers.

b. cash paid for salaries.

c. cash paid for dividends.

d. cash paid for inventory.

 

29. Many accountants prefer which method of computing cash flow from operating activities?

 

a. Combination method

b. Direct method

c. Indirect method

d. Adjusting method

 

30. The method of reporting cash flows from operating activities under which revenues and expenses on the income statement are adjusted to reflect the amount of cash received or expended for each item is the:

 

a. direct method

b. indirect method.

c. combination method.

d. adjustment method.

 

31. When preparing the statement of cash flows by the indirect method, if current liabilities increase the difference is:

 

a. added to net income.

b. added to investments.

c. deducted form net income.

d. subtracted from investments.

 

32. When preparing the statement of cash flows by the indirect method, if accumulated depreciation increases the differences is:

 

a. added to net income.

b. added to investments.

c. deducted from net income.

d. not considered in the statement of cash flows using the indirect method.

 

33. When using the indirect method, which of the following would be included in the net cash flows from operating activities section of a cash flow statement?

 

a. Sales of plant, property and equipment

b. Making loans and paying out interest

c. Payment of interest and expenses

d. Issuing bonds and notes

 

34. Rick Corporation’s Accounts Receivable decreased by $25,000 during the year. What is the adjustment to the cash flow statement when it is prepared by the indirect method?

 

a. Subtract the decrease from the net income in operating activities.

b. Add the decrease to the net income in operating activities.

c. Add the decrease in the investing activities section.

d. Subtract the decrease in the financing activities.

 

35. Collins Corporation reported a net income of $35,000, depreciation expenses of $20,000, an increase in Accounts Payable of $2,000, and an increase in Accounts Receivable of $3,000. Net cash flow from operating activities using the indirect method is:

 

a. $55,000

b. $54,000

c. $50,000

d. $56,000

 

36. Trundle Corporation reported a net income of $40,000, depreciation expenses of $1,000, sales of additional common shares of $25,000, and a decrease in Accounts Payable of $8,000. Net cash flow from operating activities using the indirect method is:

 

a. $41,000

b. $32,000

c. $33,000

d. $58,000

 

37. Smith Corporation reported a net income of $54,000, depreciation expenses of $10,000, an increase in Accounts Payable of $3,000, and an increase in Accounts Receivable of $1,500. Under the indirect method, net cash flow from operating activities is:

 

a. $62,500

b. $59,500

c. $48.500

d. $65,500

 

38. Big Toy Corporation’s records show a profit of $30,000, depreciation expenses of $10,000, and cash dividends declared and paid of $5,000. The amount of cash used in operating activities using the indirect method is:

 

a. $40,000

b. $30,000

c. $20,000

d. $10,000

 

39. Carmen’s Candies net income was $40,000. Accounts Receivable decreased by $30,000, Merchandise Inventory increased by $20,000, Accounts Payable decreased by $4,000, and Salaries Payable increased by $1,000. The net cash flow from operating activities using the indirect method is:

 

a. $33,000

b. $47,000

c. $53,000

d. $61,000

 

40. Fidelity Furniture’s net income was $25,000. Accounts Receivable decreased by $18,000, Merchandise Inventory Increased by $7,000, Accounts Payable increased by $4,000, and Salaries Payable decreased by $3,000. The net cash flow from operating activities using the indirect method is:

 

a. $57,000

b. $43,000

c. $37,000

d. $15,000

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Question 1 Which of the following is true about the rental of real estate? Question 1 options:
Depreciation and maintenance expenses for an apartment complex are deductible.
A vacation home is a home that is rented for 15 days or more and is used by the taxpayer for personal use for more than the greater of 14 days or 10 percent of the days it is rented for fair value during the year. If a home is rented for less than 15 days a year, the rental income is not taxable.
Repairs on
rental property are deductible by the taxpayer
All of the above.
Question 2 John owns a second home in Palm Springs, CA. During the year, he rented the house for $4,000 for 30 days and used the house for 10 days during the
summer. The house remained vacant during the remainder of the year. The expenses for the home included $5,000 in mortgage interest, $600 in property taxes, $900 for utilities and maintenance, and $3,500 of depreciation. What is John’s deductible rental loss,
before considering the passive loss limitations? Question 2 options: $200 $875 $1,600 $3,500 $0 Question 3 Question 3 Helen, a single taxpayer, has modified adjusted gross income (before passive losses) of $90,000. During 2014, Helen’s
rental house generated a loss of $15,000. Assuming Helen is actively involved in the management of the property, what is the amount of Helen’s permitted loss deduction from the rental house? Question 3 options: $0 $5,000 $10,000 $15,000 None of the above Save
Which of the following types of income is passive income?
Question 4 options:
Income from limited partnership investments
Self employment income
Wages
Interest and dividend income
Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has $80,000 of business income and $40,000 of losses from actively managed real estate rentals. How much of the $40,000 in losses is he allowed to claim on his tax return?
Question 5 options:
$40,000
None
$20,000
$25,000
Question 6
Which of the following is false about the self-employed health insurance deduction?
Question 6 options:
The self-employed health insurance deduction is an itemized deduction.
Long-term care premiums may be deducted within specified dollar limitations based on age.
The deduction cannot be claimed when a subsidized employer health insurance plan is also available.
The deduction cannot be claimed if the taxpayer has an overall business loss from self-employment.
Question 7
Lyndon, age 24, has a nonworking spouse and earns wages of $36,000 for 2014. He also received rental income of $5,000 and dividend income of $900 for the year. What is the maximum total amount Lyndon can deduct for contributions to his and his wife’s individual retirement accounts for the 2014 tax year?
Question 7 options:
$4,500
$5,500
$11,000
$3,600
Question 8
Mary has a Roth IRA held more than 5 years to which she has contributed $30,000. The IRA has a current value of $62,000. Mary is 55 years old and she takes a distribution of $38,000. How much of the distribution will be taxable to Mary?
Question 8 options:
$38,000
$30,000
0
$8,000
Question 9
Bob earns $40,000 during the current year. His employer contributes $2,000 (5 percent of Bob’s salary) to a qualified retirement plan for Bob. This pension plan is what kind of plan?
Question 9 options:
Defined benefit plan
Profit-sharing plan
Defined contribution plan
Employee Stock Ownership Plan
Question 10
James’ employer makes a $2,000 contribution to a qualified retirement plan for James in the current year. James is only 45 years old and does not expect to retire until age 65, 20 years from now. What is the proper tax treatment of the $2,000 contribution for James’ employer?
Question 10 options:
The $2,000 is deductible in the year James retires by the employer.
The $2,000 is deductible in the current year by the employer.
Only one-twentieth ($100) is deductible in the current year by the employer.
The $2,000 is never deductible.

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Question 1 Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following
data: D0 = $0.90; P0 = $30.00; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings? 9.60% 11.33% 8.37% 10.21%

 

Question 2 Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50),
the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity.
What is the company’s WACC if all the equity used is from retained earnings?

7.07% 7.36% 7.67% 7.98% 8.29%

 

Question 3 Masulis Inc. 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 4 Cash flows -$950 $525 $485 $445 $405

1.61 years 1.79 years 1.99 years 2.22 years 2.44 years 5 points

 

Question 4 Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual
coupon that is paid semiannually. The bond currently sells for $950, and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation? 4.81% 4.49% 4.31% 5.48% 5.30%

 

Question 5 Lasik Vision Inc. recently analyzed the project
whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much
did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected. Old WACC: 8.00% New WACC 8.50% Year 0 1 2 3 Cash flows -$1,000 $410 $410 $410

-$8.99 -$9.27 -$9.46 -$10.88  -$11.83

 

Question 6 Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project took place, the Federal Reserve changed interest rates and therefore the firm’s WACC. The Fed’s
action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s expected NPV can be negative, in which case it should be rejected. Old WACC: 10.00% New WACC: 11.25% Year 0 1
2 3 Cash flows -$1,000 $410 $410 $410 -$18.89 -$19.88 -$20.93 -$22.03 -$23.13

 

Question 7 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
-$650 $500 $500 $500 1.75years 1.83years 1.81years 1.47years 1.56years

 

Question 8 To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid
semiannually, sells at a price of $875, and has a par value of $1,000. If the firm’s tax rate is 40%, what is the component cost of debt for use in the WACC calculation? 5.95% 5.63% 6.47% 6.15% 5.31%

 

Question 9 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 $500 1.88 years 2.09 years 2.29 years 2.52 years 2.78 years

 

Question 10 Stern Associates is considering a project
that has the following cash flow data. What is the project’s payback? Year 0 1 2 3 4 5 Cash flows -$950 $300 $310 $320 $330 $340 3.06 years 3.24 years 2.97 years 3.70 years 3.49 years

 

Question 11 Ingram Electric Products 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: 9.50% Year 0 1 2 3 Cash flows -$800 $350 $350 $350 15.03% 13.73% 10.88%
12.95% 10.62%

 

Question 12 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 -$950 $500 $500 $500 2.22years 2.04years 2.75years 1.69years
2.35years

 

Question 13
Ingram Electric Products is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.
Old WACC: 11.00%
Year 0 1 2 3
Cash flows -$800 $350 $350 $350
8.86%
9.84%
10.94%
12.15%
13.50%
Question 14
Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.
Old WACC: 10.00% New WACC 13.50%
Year 0 1 2 3
Cash flows -$1,000 $410 $410 $410
-$64.47
-$46.56
-$59.70
-$61.49
-$54.32
5 points
Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC 8.50%
0 1 2 3 4
CFS -$1,100 $550 $600 $100 $100
CFL -$2,700 $650 $725 $800 $1,400

$84.43
$75.14
$79.36
$102.16
$105.54
Question 16
To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
4.35% 4.58% 4.83% 5.08% 5.33%

Question 17
S. Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?
-1.49%
-1.66%
-1.84%
-2.03%
-2.23%

Question 18
Last month, Lloyd’s Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.
Old WACC: 10.00% New WACC 12.50%
Year 0 1 2 3
Cash flows -$1,000 $410 $410 $410
-$43.26
-$39.80
-$48.02
-$47.15
-$44.12
Question 19
Assume that Kish Inc. hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D0 = $0.90; P0 = $25.00; and g = 7.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?
12.26%
10.85%
13.24%
12.37%
11.72%
Question 20
Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?
10.69%
11.25%
11.84%
12.43%
13.05%