ACCOUNTING

21) Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash

inflows from its project for years 1, 2, 3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if its

required payback period is 31 months? 21) ______

A) No, because it pays back in over 35 months.

B) Yes, because it pays back in 25 months.

C) No, because it pays back in over 31 months.

D) Yes, because it pays back in 28 months.

22) Dice, Inc. is considering a very risky five-year project that has an initial outlay or cost of $70,000. The future cash

inflows from its project for years 1, 2, 3, 4, and 5 are all the same at $35,000. Dice uses the internal rate of return method to

evaluate projects. Will Dice accept the project if its hurdle rate is 41.00%? 22) ______

A) Dice will accept this project because its IRR is over 45.50%.

B) Dice will accept this project because its IRR is about 41.50%.

C) Dice will probably reject this project because its IRR is about 39.74%, which is slightly below its hurdle rate.

D) Dice will probably accept this project because its IRR is about 41.04%, which is slightly above its hurdle rate.

23) Pigeon, Inc. is currently considering an eight-year project that has an initial outlay or cost of $80,000. The future cash

inflows from its project for years 1 through 8 are the same at $30,000. Pigeon has a discount rate of 13%. Because of

concerns about funds being short to finance all good projects, Pigeon wants to compute the profitability index (PI) for

each project. What is the PI for Pigeon’s current project? 23) ______

A) About 1.70 B) About 1.80 C) About 1.50 D) About 1.60

24) Find the Modified Internal Rate of Return (MIRR) for the following annual series of cash flows, given a discount rate

of 10.50%: Year 0: -$75,000; Year 1: $15,000; Year 2: $16,000; Year 3: $17,000; Year 4: $17,500; and, Year 5: $18,000. 24)

______

A) About 6.35% B) About 7.35% C) About 7.88% D) About 6.88%

25) Opie, Inc. is considering an eight-year project that has an initial after-tax outlay or after-tax cost of $180,000. The future

after-tax cash inflows from its project for years 1 through 8 are the same at $38,000. Opie uses the net present value

method and has a discount rate of 11.50%. Will Opie accept the project? 25) ______

A) Opie rejects the project because the NPV is about -$11,114.

B) Opie rejects the project because the NPV is less than -$12,000.

C) Opie accepts the project because the NPV is greater than$12,000.

D) Opie accepts the project because the NPV is about $11,114.

26) Consider the following four-year project. The initial outlay or cost is $180,000. The respective cash inflows for years 1,

2, 3 and 4 are: $100,000, $80,000, $80,000 and $20,000. What is the discounted payback period if the discount rate is 11%?

26) ______

A) About 2.000 years B) About 2.135 years

C) About 2.427 years D) About 1.667 years

27) Baldwin Co. purchases an asset for $50,000. This asset qualifies as a five-year recovery asset under MACRS, with the

fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. Baldwin has

a tax rate of 35%. If the asset is sold at the end of four years for $5,000, what is the after-tax cash flow from disposal?

27) ______

A) $6274.00 B) $3,408.22 C) $3,535.36 D) $2,592.00

28) Your firm has just issued a 10-year $1,000.00 par value, 10% annual coupon bond for a net price of $964.00. The tax

rate is 30%. What is the after-tax cost of debt financing? Use a financial calculator to determine your answer. 28)

______

A) 9.45% B) 11.10% C) 10.00% D) 7.41%

29) The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000,

retained earnings equals $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term

debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%,

and the firm has a corporate tax rate of 30%, calculate the firm’s WACC adjusted for taxes. 29) ______

A) 10.00%

B) 9.09%

C) 10.11%

D) There is not enough information to answer this question.

30) Use the dividend growth model to determine the required rate of return for equity. Your firm has just paid a dividend

of $1.50 per share, has a recent price of $31.82 per share, and anticipates a growth rate in dividends of 4.00% per year for

the foreseeable future. 30) ______

A) 9.09%

B) 8.90%

C) 8.71%

D) There is not enough information to answer this question.

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