NAME: William Louderback

UNIVERSITY OF INCARNATE WORD

FINAL EXAM

ACC3321

1. If the risk-free rate is 8 percent and the market risk premium is 2 percent, what is the required return for the market? D. 10% 2. If the annual return on the S&P 500 Index was 18.1 percent. The annual T-bill yield during the same period was 6.2 percent. What was the market risk premium during that year? B. 11.9% 3. A company has a beta of 0.75. If the market return is expected to be 16 percent and the risk-free rate is 6 percent, what is the company's required return? B. 13.5% 4. A company has a beta of 2.91. If the market return is expected to be 16 percent and the risk-free rate is 4 percent, what is the company's risk premium? D. 34.92% 5. You have a portfolio with a beta of 1.25. What will be the new portfolio beta if you keep 80 percent of your money in the old portfolio and 20 percent in a stock with a beta of 1.75? B. 1.35 6. If a company's current stock price is $65.40 and it is likely to pay a $2.25 dividend next year. Since analysts estimate the company will have a 11.25% growth rate, what is its expected return? D. 14.69% 7. You own $2,000 of City Steel stock that has a beta of 1.75. You also own $4,000 of Rent-N-Co (beta = 2.0) and $2,000 of Lincoln Corporation (beta = -0.75). What is the beta of your portfolio? B. 1.625 8. FlavR Co stock has a beta of 2.0, the current risk-free rate is 2, and the expected return on the market is 9 percent. What is FlavR Co's cost of equity? C. 16%

9. WC Inc. has a $10 million (face value), 10 year bond issue selling for 99 percent of par that pays an annual coupon of 9 percent. What would be WC's before-tax component cost of debt? B. 9.10% 10. Fern has preferred stock selling for 95 percent of par that pays an 8 percent annual coupon. What would be Fern's component cost of preferred stock? C. 8.42% 11. JackITs has 5 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 20 thousand bonds. If the common shares are selling for $28 per share, the preferred share are selling for $13.50 per share, and the bonds are selling for 98 percent of par, what would be the weight used for equity in the computation of JackIT's WACC? B. 80.88% 12. AnnounceIt has 20 million shares of common stock outstanding, 40 million shares of preferred stock outstanding, and 100 thousand bonds. If the common shares are selling for $35 per share, the preferred share are selling for $18.50 per share, and the bonds are selling for 99 percent of par, what would be the weight used for equity in the computation of AnnounceIt's WACC? C. 6.43% 13. PAW Industries has 5 million shares of common stock outstanding with a market price of $8.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 100,000 bonds outstanding, each with face value $1,000 and selling at 96% of par value. The cost of equity is 19%, the cost of preferred is 15%, and the cost of debt is 9%. If PAW's tax rate is 34%, what is the WACC? B. 10.38% 14. Your Company is considering a new project that will require $500,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $100,000 using straight-line depreciation. The cost of capital is 14%, and the firm's tax rate is 34%. Estimate the present value of the tax benefits from depreciation. C. $40,000

15. Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of 3 years, a $25,000 estimated resale value, and falls under the MACRS 5-Year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the net cash flow for year one of this project? B. $3,150 16. You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14% and the tax rate is zero. B. Machine B 17. Suppose you sell a fixed asset for $90,000 when it's book value is $95,000. If your company's marginal tax rate is 40%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)? C. $92,000 18. Compute the NPV for Project X and accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent.

C. $392.44 19. This technique for evaluating capital projects tells how long it will take a firm to earn back the money invested in a project. A. pay back 20. Choose which statement makes this sentence false: The basic IRR statistic D. is the hands-down winner, working equally well with normal or non-normal cash flows with independent or mutually exclusive projects.