Final Exam Review S.I. Fin 3014/30/08**This practice exam is meant to cover the information since exam 3.**Chapter 10 Material: The Cost of Capital1. What is the formula for the weighted average cost of capital?WACC= wdrd(1-T) + wprp + wcrsW’s refer to the firms capital structure weightsfor now they are givenR’s refer to the cost of each componentrd(1-T)= component cost of debt want it after tax. YTM is common measure of rd2. A 12 year, 15% semi annual coupon bond sells for $1,586.54 What is the cost of rd?N= (12 x 2)= 24I/Y= ?PV= -1,586.54PMT= (.15/2)(1000)= 75FV= 1000CPT I/Y= 3.751 *2 (b/c semi annual, so have to convert to annual)= 7.501%3. A company’s current outstanding bonds have 10% coupon and 12% YTM. Their marginal tax rate is 35%. What is the after tax cost of debt?12(1-0.35)= 7.8%rd(1-T)4. If a company’s preferred stock sells at a price of $45.00 a share and pays a dividend of $6.50, what is the cost of preferred stock?(rp)= Dp/Pp = 6.50/45 = 14.44% 5. Which of the following is used to calculate the common cost of equity rs?a. CAPM: rs= rrf + (rm-rrf)bb. DCF: rs= (D1/P0) + gc. Own Bond Yield Plus Risk Premium: rs= rd + RPd. All of the above can be used.6. The risk free rate is 6%, the market risk premium is 9% and the beta is 1.45. What is the common cost of equity using the CAPM?rs= rrf + (rm-rrf)brs= 6 + (9)(1.45) = 19.05% 7. A company just paid a dividend of 3.50, and their stock is currently selling at $35.50 per share. It is expected to have a constant growth rate of 5%. What is the common cost of equity using the DCF approach?D1= D0(1+g) = 3.5(1.05) = 3.675DCF: rs= (D1/P0) + g = (3.675/35.50) + 0.05 = 15.35% 8. A company’s common stock is currently trading for $50 per share and it is expected to pay a dividend of $4.55 at the end of the year. The constant growth rate is 5.75%. If they wanted to issue new stock, andwould have flotation cost of 10%, what would the cost of equity of the new stock be?rs= (D1/[P0(1-F)] + g) = (4.55/ [50(1-0.10)] + 0.0575) = 15.86% 9. A company has a target capital structure of 35% debt, and 65% common equity, with no preferred stock. Its before tax cost of debt is 10% and its marginal tax rate is 35%. The current stock price is $32.50 and they just paid a dividend of $3.00. It is expected to grow at a constant rate of 6.5%. What is the cost of common equity and theWACC?D1= D0(1 + g) = 3(1.065) = 3.195rs= (D1/P0) + g = (3.195/32.50) + .065 = 16.33%WACC= wdrd(1-T) + wprp + wcrs = (0.35)(10%)(1-.35) + 0 + (0.65)(16.33%) = 2.275 + 0 + 10.6145 = 12.8895%10. Which of the following factors influence a company’s composite WACC?a. Market conditionsb. The firms capital structure and dividend policyc. The firms investment policyd. All of the aboveChapter 11 Material: Capital Budgeting1. What is the recipe for capital budgeting?a. Estimate Cash Flowsb. Assess Riskiness of Cash Flowsc. Determine Appropriate Cost of Capitald. Find NPV and or IRR (PB, DPB, MIRR, etc)e. Accept if NPV>0 and or IRR > WACC.2. Which of the following are types of projects that have cash flowsthat are unaffected by each other and therefore, more than one can be accepted at a time?a. Mutually exclusive projectsb. Independent projectsc. Dependent projectsd. Accepted projects3. A major airline purchased a fleet of jets to run its business operations. The initial cost was $50,000,000. This cost was followed by a steady inflow of revenue generated from ticket sales amounting to $15,000,000 each year for 5 years. The jets then all had to be repaired and updated resulting in a cost of $25,000,000. This is an example of a ___________cash flow stream.a. Normalb. Non normalc. Stranged. Negativee. PositiveUse the following information for #4-74. Project W costs $35,000 and has expected cash inflows of $12,000 a year for 5 years. It has a weighted average cost of capital of 10%. What is the projects NPV? Should you accept orreject the project based on NPV?CF0= -35,000CF1= 12,000F= 5NPVI= 10Enter, downNPV CPT= $10,489.44 You should accept the project b/c the NPV is > 0. 5. What is the IRR for project W? Should you accept or reject the project based on IRR?IRR CPT= 21.15%Accept because the IRR > WACC6. What is the payback period for project W?Student Version:Make timelineProfessional Version:NPV, down, down, downPB CPT= 2.92 years 7. What is the discounted payback for project W?Student VersionMake timeline then discount cash flowsProfessional VersionNPV, down, down, down, downDPB CPT= 3.63 years 8. If you are dealing with mutually exclusive projects, what methodof evaluation should you use, and why?a. IRR because it gives better results.b. NPV because in the case that there is a cross over point, and the WACC is less than the cross over point, the NPV and IRR will give conflicting results, and NPV has the more realistic reinvestment rate assumption.c. IRR because in the case that there is a cross over point, and the WACC is less than the corss over point, the NPVand IRR will give conflicting results, and IRR has the morerealistic reinvestment rate assumption.d. NPV or MIRR because in the case that there is a cross over point, and the WACC is less than the crossover point, the NPV and IRR will give conflicting results, and NPV has the more realistic reinvestmentrate assumption, also MIRR assumes that the incremental cash flows are reinvested at the WACC, much like NPV.e. Payback period, because it is the easiest method and it gives the clearest picture of what kind of return projects will yield. 9. What is the MIRR?The modified internal rate of return. It assumes that CF’s are reinvested at the WACC so it eliminates the problem of conflicting results for NPV/IRR. 10. A project costs 60,000 and has cash inflows of 15,000 each year for ten years. It has a weighted average cost of capital of 11%. What is the projects MIRR?Student Version:N= 10I/Y=11PV=0PMT= 15000CPT FV=$250,830.13N=10 I/Y=?PV= -60,000PMT= 0FV= $250,830.13CPT I/Y= 15.38%Professional Version:CFo=-60,000Enter, downCF1= 15,000Enter, downF1= 10IRRRI= 11Enter, downMOD= CPT= 15.38Chapter 12: Cash Flow Estimation and Risk Analysis1. Match the terms in the column on the left with the definition in the column on the right. A. Sunk Cost (3)1. When a new project reduces cash flows that the firm would otherwise have had. A negative impact.B. Incremental Cash Flow (5)2. The effect on the firm or