Corporate Finance and Horizon Company

12. The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years.
Year Cash Flow
1. . . . . . . . . $15,000
2. . . . . . . . . 25,000
3. . . . . . . . . 40,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years. If the cost of capital is 10 percent, what is the NPV of the project and should it be undertaken?

A. 0
($3,185) and it should be undertaken
B. 0
$3,185 and it should be undertaken
C. 0
($3,185) and it should not be undertaken
D. 0
$3,185 and it should not be undertaken

13. Al Bundy is evaluating a new advertising program that could increase sales. Possible outcomes and probabilities of the outcomes are shown. Compute the coefficient of variation.
Additional
Possible Outcomes Sales in Units Probabilities
Ineffective campaign . . . . . . . . 40 .20
Normal response . . . . . . . . . . . 60 .50
Extremely effective . . . . . . . . . 140 .30
A. 0
.50
B. 0
.42
C. 0
.65
D. 0
25

14. Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $75,000. The inflows from projected business over the next five years are given below. Which method should be selected using net present value analysis?
Years Method 1 Method 2
1 . . . . . . . . . . $18,000 $20,000
2 . . . . . . . . . . 24,000 25,000
3 . . . . . . . . . . 34,000 35,000
4 . . . . . . . . . . 26,000 28,000
5 . . . . . . . . . . 14,000 15,000
A. 0
Select Method 2
B. 0
Neither, both are negative
C. 0
Both methods equal and should be selected
D. 0
Select Method 1

15. A common stock with a beta of 1.0 is said to be?
A. 0
Riskier than the market
B. 0
Of equal risk with the market.
C. 0
Less risky then the market
D. 0
Even Steven

16. The (Fill in the Blank) is known in financial literature as our best risk-return line
A. 0
Co-efficient of correlation
B. 0
Efficient Frontier
C. 0
risk-adjusted discount rates
D. 0
Efficient Plane

17. The most expensive source of financing for a firm is:
A. 0
Debt
B. 0
Preferred Stock
C. 0
Retained Earnings
D. 0
New Common Stock

18. The overall cost of financing for the firm is called the
A. 0
weighted average cost of capita
B. 0
cost of preferred stock
C. 0
retained earnings breakpoint
D. 0
None of the above

19. Waste Disposal Systems, Inc., has an after-tax cost of debt of 6 percent. With a tax rate of 33 percent, what can you assume the yield on the debt is?
A. 0
10.50%
B. 0
8.10%
C. 0
8.95%
D. 0
6.00%

20. Global Technology's capital structure is as follows:

Debt . . . . . . . . . . . . . . 35%
Preferred stock . . . . . . 15
Common equity . . . . . 50

The after-tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent. Cost of preferred stock Comparison of the costs of debt and preferred stock Cost of retained earnings and new common stock Costs of retained earnings and new common stock Growth rates and common stock valuation Weighted average cost of capital

What is Global Technology's weighted average cost? Note: you can use table 11-1 on page 313.
A. 0
12%
B. 0
10.52%
C. 0
10.25%
D. 0
13.5%

21. Moon and Sons, Inc., earned $120 million last year and retained $72 million.
What is the payout ratio?
A. 0
28%
B. 0
35%
C. 0
60%
D. 0
40%

22. Peabody Mining Company's common stock is selling for $50 the day before the stock goes ex-dividend. The annual dividend yield is 5.6 percent, and dividends are distributed quarterly. Based solely on the impact of the cash dividend, What will the new price of the stock be?
A. 0
$49.30
B. 0
$47.50
C. 0
$49.10
D. 0
$49.90

23. A convertible security is:
A. 0
A security that can be converted into common stock at the option of the owner.
B. 0
A security that can be converted into debt at the option of the owner.
C. 0
A security that can be converted into preferred stock at the option of the owner.
D. 0
none of the above

24. The interest rate on convertibles is generally __________ the interest rate on nonconvertible securities.
A. 0
greater than
B. 0
less than
C. 0
the same as
D. 0
none of the above