[removed]
e.
The stock’s price one year from now is expected to be 5% above the current price
15. Mushali Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s aftertax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
[removed] 
a. 
$5,558 
[removed] 
b. 
$5,850 
[removed] 
c. 
$6,143 
[removed] 
d. 
$6,450 
[removed] 
e. 
$6,772 
16. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock’s expected capital gains yield for the coming year?
[removed] 
a. 
6.50% 
[removed] 
b. 
6.83% 
[removed] 
c. 
7.17% 
[removed] 
d. 
7.52% 
[removed] 
e. 
7.90% 
17. Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.
WACC 
12.25% 





Year 

0 
1 
2 
3 
4 
Cash Flows 

$850 
$300 
$320 
$340 
$360 
[removed] 
a. 
13.42% 
[removed] 
b. 
14.91% 
[removed] 
c. 
16.56% 
[removed] 
d. 
18.22% 
[removed] 
e. 
20.04% 
18. Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?
[removed] 
a. 
10.69% 
[removed] 
b. 
11.25% 
[removed] 
c. 
11.84% 
[removed] 
d. 
12.43% 
[removed] 
e. 
1305% 
19. Lafarge Inc. estimates that its averagerisk projects have a WACC of 10%, its belowaverage risk projects have a WACC of 8%, and its aboveaverage risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?
a. Project B, which is of belowaverage risk and has a return of 8.5%.
b. Project C, which is of aboveaverage risk and has a return of 11%.
c. Project A, which is of average risk and has a return of 9%.
d. None of the projects should be accepted.
e. All of the projects should be accepted.
[removed] 
a. 
Project B, which is of belowaverage risk and has a return of 8.5% 
[removed] 
b. 
Project C, which is of aboveaverage risk and has a return of 11%. 
[removed] 
c. 
Project A, which is of average risk and has a return of 9% 
[removed] 
d. 
None of the projects should be accepted 
[removed] 
e. 
All of the projects should be accepted 
20. You work for Pitloa Inc., which is considering a new project whose data are shown below. What is the project’s Year 1 cash flow?
Sales Revenues 
$62,500 
Depreciation 
$8,000 
Other operating costs 
$25,000 
Interest Expense 
$8,000 
Tax rate 
35.0% 
[removed] 
a. 
$25,816 
[removed] 
b. 
$27,175 
[removed] 
c. 
$28,534 
[removed] 
d. 
$29,960 
[removed] 
e. 
$31,458 
21. Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10year expected operating life. What is the project’s Year 4 cash flow?
Equipment cost (depreciable basis) 
$70,000 
Sales revenues, each year 
$42,500 
Operating costs (excl. deprec.) 
$25,000 
Tax rate 
35.0% 
[removed] 
a. 
$11,814 
[removed] 
b. 
$12,436 
[removed] 
c. 
$13,090 
[removed] 
d. 
$13,745 
[removed] 
e. 
$14,432 
22. Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?
[removed] 
a. 
8.03% 
[removed] 
b. 
8.24% 
[removed] 
c. 
8.45% 
[removed] 
d. 
8.67% 
[removed] 
e. 
8.89% 
23. Tesar Chemicals is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV. If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what’s the chosen NPV versus the maximum possible NPV? Note that (1) “true value” is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.
WACC: 7.5% 





Year 
0 
1 
2 
3 
4 
CFS 
$1,100 
$550 
$600 
$100 
$100 
CFL 
$2,700 
$7650 
$725 
$800 
$1,400 
[removed] 
a. 
$138.10 
[removed] 
b. 
$149.21 
[removed] 
c. 
$160.31 
[removed] 
d. 
$171.42 
[removed] 
e. 
$182.52 
24. As a member of UA Corporation’s financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?
Sales Revenues 
$42,500 
Depreciation 
$10,000 
Other operating costs 
$17,000 
Interest Expense 
$4,000 
Tax rate 
35.0% 
[removed] 
a. 
$16,351 
[removed] 
b. 
$17,212 
[removed] 
c. 
$18,118 
[removed] 
d. 
$19,071 
[removed] 
e. 
$20,075 
25. Clemson Software is considering a new project whose data are shown below. The required equipment has a 3year tax life, after which it will be worthless, and it will be depreciated by the straightline method over 3 years. Revenues and other operating costs are expected to be constant over the project’s 3year life. What is the project’s Year 1 cash flow?
Equipment cost (depreciable basis) 
$65,000 
Straightline depreciation rate 
33.333% 
Sales revenues, each year 
$60,000 
Operating costs (excl. deprec.) 
$25,000 
Tax rate 
35.0% 
[removed] 
a. 
$28,115 
[removed] 
b. 
$28,836 
[removed] 
c. 
$29,575 
[removed] 
d. 
$30,333 
[removed] 
e. 
$31,092 
26. Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm’s required return (rs) is 11%, what is its current stock price?
[removed] 
a. 
$30.57 
[removed] 
b. 
$31.52 
[removed] 
c. 
$32.49 
[removed] 
d. 
$33.50 
[removed] 
e. 
$34.50 