BUAD 306 Business Finance Fall 2015 Exam 3 There are 28 questions in the exam You have 75 minutes I agree that I will not give or receive unauthorized help during this test I understand that giving or receiving such help during the test is cheating and will result in a failure of the test and other possible repercussions according to University policy I pledge my honor that I have not violated the USC Student Conduct Code in this examination Name Print Clearly Signature Date ID Number Your grade will be based on answers recorded on your scantron not this paper Therefore make sure you fill in your scantron sheet as you go along because you will not be given any extra time at the end of the exam to fill out your form Fill the oval in completely with an appropriate pencil Students are responsible for any incorrect erasure so make sure you completely erase any unintended answers You are allowed to use calculators for this test but not any device that can connect wirelessly to other devices This test is closed book no notes are allowed Formulas are provided at the end of the test Do all of the following BEFORE answering any test questions 1 Write your name on the front side of the scantron sheet 2 Write your Student ID Number in the subject box 3 Write the test form letter in the Test No box EXAM FORM B 1 KS Communications is considering a project with an initial fixed asset cost of 3 million which will be depreciated straight line over the 10 year life of the project At the end of the project the equipment will be sold for an estimated salvage of 250 000 The project will increase sales by 450 000 a year The tax rate is 35 percent The project will require 80 000 of inventory which will be recouped when the project ends Should this project be implemented if the firm requires a 20 percent rate of return Why or why not a No The NPV is 1 396 879 63 b No The NPV is 1 262 720 c No The NPV is 156 627 21 d Yes The NPV is 387 516 67 e Yes The NPV is 466 940 57 2 Two customers want to buy copper Customer A values the copper at 9 per pound Customer B values the copper at 10 per pound The seller will sell all the copper to the customer who pays the most Fill in the blanks in the following sentences The price will be per pound This price represents the A 10 00 highest value B 10 00 opportunity cost C 9 00 highest value D 9 50 the erosion cost E 9 01 opportunity cost 3 ABC Corp spent 10 million in R D last year to develop a new anti aging drug Last month the results of a 2 million test market study showed that the product would have a large customer base However selling the drug would erode 5 million in sales of an anti aging cream already produced by ABC A different company XYZ Corp has also developed an anti aging drug that is virtually identical to the one made by ABC Which of the following should ABC Corp include as part of the incremental cash flows of the new drug a R D only b Test market study only c Sales erosion only d R D test market study and sales erosion e None of R D test market study or sales erosion 4 Silver Petroleum Inc just purchased some equipment at a cost of 67 000 What is the proper methodology for computing the depreciation expense for year 5 if the equipment is classified as 5 year property for MACRS a b c d e 67 000 x 1 0 20 x 0 1152 67 000 1 0 20 0 1152 67 000 x 0 1152 67 000 x 1 0 1152 67 000 x 1 0 1152 5 You own some equipment that you purchased 3 years ago at a cost of 350 000 The equipment is 5 year property for MACRS You are considering selling the equipment today for 123 000 Which one of the following statements is correct if your tax rate is 40 a b c d e The taxable amount at the sale is 22 200 The tax due on the sale is 26 425 The book value today is 0 The accumulated depreciation to date is 329 840 The aftertax salvage value is 73 800 6 Kepler Company purchased a lot in Pasadena 3 years ago at a cost of 1 020 000 Today that lot has a market value of 1 295 000 At the time of purchase the company spent 80 000 to level the lot and another 120 000 to install underground pipes The company now wants to build a new facility on that site and the facility cost is estimated at 555 000 What amount should be used as the initial cash flow for this project a b c d e 1 220 000 1 295 000 1 850 000 1 495 000 1 950 000 7 If the New York Stock Exchange was strong form efficient which of the following is true A New information about a stock would have no effect on its price B Inside information could be used to generate excess returns C The risk of every stock would be the same D Since no one could earn any money no one would invest in the market E None of the above 8 A 20 year project has an initial asset investment of 240 000 and initial net working capital investment of 12 000 and an annual operating cash flow of 30 000 The fixed asset is fully depreciated over the life of the project and has no salvage value The net working capital will be recovered when the project ends The required return is 15 percent What is the project s equivalent annual cost or EAC a 6 543 b 66 308 c 68 343 d 31 800 e 70 143 9 You own a portfolio with 40 invested in a risk free asset 20 in stock A with a beta of 1 7 and 40 in stock B Your portfolio has the same expected return as the market portfolio What is the beta of stock B The risk free rate is 5 a 0 43 b 1 00 c 1 65 d 1 85 e 2 75 10 A stock has a beta of 1 84 The expected return on the market portfolio is 12 The risk free rate is 6 What is the expected return on the stock a 28 b 11 c 17 d 12 e 13 11 Which of the following statements are true A If a stock market is strong form efficient no one earns a positive return B Efficient markets mean some stocks have predictable returns C Because a market is efficient new information shouldn t lead to price changes D Competition among investors makes markets more efficient E All of the above …