C. Only S1 is correct
D. Only S1 is incorrect
Multiple Choice – Theory
1.
S1: The calculation of the cost of capital depends upon
historical costs of funds. S2: The cost of capital for each
source of funds is dependent on current market
conditions and expected rates of return.
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
9.
2.
S1: In determining the cost of debt, yields and prices of
outstanding bonds are used. S2: The cost of debt is
equal to the current bond yield on bonds of similar risk
class and adjusted for the corporate tax rate.
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
3.
S1: The amount of debt capital used by a corporation is
not related to the availability of equity funds from
retained earnings and new common stock. S2: A firm's
cost of preferred stock is equal to the preferred dividend
divided by market price plus the dividend growth rate
(Kp= D/Po+ g).
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
10. S1: Possibly the most overlooked part of the capital
budgeting process is the search for new opportunities
through innovation and creative thinking. S2: Even
though one project may have superior cash flows, top
management may sometimes choose a project that
inflates earnings instead of cash flow.
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
4.
S1: The cost of new common stock is greater than the
cost of outstanding common stock. S2: In determining
the cost of preferred stock, the earnings on outstanding
preferred stock may be used as a proxy.
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
5.
Financial capital does not include:
A. stock.
B. bonds.
C. preferred stock.
D. working capital.
6.
The overall weighted average cost of capital is used
instead of costs for specific sources of funds because:
A. use of the cost for specific sources of capital would
make investment decisions inconsistent.
B. a project with the highest return would always be
accepted under the specific cost criteria.
C. investments funded by low cost debt would have an
advantage over other investments.
D. use of the cost for specific sources of capital would
make investment decisions inconsistent and
investments funded by low cost debt would have an
advantage over other investments.
7.
8.
JJJ Beverages has an optimal capital structure that is
50% common equity, 40% debt, and 10% preferred
stock. Debreu's pretax cost of equity is 12%. Its pretax
cost of preferred equity is 7%, and its pretax cost of debt
is also 7%. If the corporate tax rate is 35%, what is the
weighted average cost of capital?
A. between 7% and 8%
B. between 8% and 9%
C. between 9% and 10%
D. between 10% and 12%
S1; The payback method is easy to understand and
places a heavy emphasis on liquidity. S2: Using the
payback method can be appropriate when the time value
of money is very low.
A. Both statements are correct
B. Both statements are incorrect
S1: In most capital budgeting decisions the emphasis
should be on reported earnings rather than cash flows.
S2: The first administrative consideration in any capital
budgeting process is collection of data
A. Both statements are correct
B. Both statements are incorrect
C. Only S1 is correct
D. Only S1 is incorrect
11. Cash flow can be said to equal
A. operating income less taxes plus depreciation.
B. operating income less taxes.
C. operating income before depreciation and taxes plus
depreciation.
D. operating income after taxes minus depreciation.
12. Which of the following items is irrelevant in determining
the relevant cost of acquisition in capital budgeting
decisions?
A. Trade in value for the old assets being replaced
B. Original cost of the new assets to be acquired
C. Depreciation of the new assets
D. Avoidable
repair
expense,
net
of
tax
13. An appropriate capital budgeting process requires that
the following steps are taken in which order?
a) collection of data
b) reevaluation and adjustment
c) evaluation and decision making
d) search for and discovery of investment opportunities
A. d, a, c, b
B. d, a, b, c
C. d, b, a, c
D. b, d, a, c
14. Which is a method of ranking investment proposals that
is not time-adjusted but considers the salvage value of
the investment?
A. Bail out period
B. Payback method
C. Internal rate of return method
D. Accounting rate of return
15. It measures the estimated profitability of the project
from the conventional accounting view.
A. Bail out period
B. Payback method
C. Internal rate of return method
D. Accounting rate of return
Problem Solving
1.
A company finances its operatons with 50% debt and
50% equity. It net income is P30,000,000 and it has a
dividend payout ratio of 20%. Its capital budget is
P40,000,000 this year. The interest rate on company’s
debt is 10% and the company’s tax rate is 40%. The
company’s common stock trades at P66 per share, and
its curent dividend of P4 per share is expected to grow
at a constat rate of 10% per year. The floatation cost of
external equity, if issued is 5% of the peso amount
issued. Compute for the WACC.
2.
On December 1, 2021, HP Corp. is contemplating to
invest into a new equipment costing P2,500,000 plus
AE 313 – FINALS QUIZ 1
12092022
2
installation cost of P200,000 to replace its old
equipment that has a book value of P400,000 and a
remaining useful life of 4 years. The estimated useful life
of the new equipment is 4 years and has a salvage value
of P500,000. If the company will favor the replacement
decisions, the old equipment can be sold for P150,000
but additional working capital investment must be made
amounting to P400,000. However, the company must
incur repair cost of P180,000 to continuously use the -> it is not avoidable since kailangan mo magincur ng cost para
old equipment. Annual cash operating costs of the old magamit yung equipment.
equipment is P4,000,000 while the annual cash
operating cost of the new equipment is P2,400,000. At
the end of the useful life, cost to remove will amount to
P100,000. The company uses a tax rate of 35%, payback
period is 2.5 years or less, accounting rate of return is
15%.
A. Compute for the net investment. 2,747,500
B. Compute for the annual cash flow after tax. 1,197,500
3.
A machine costing P8,350 yields total cash flows of
P13,100 over 5 years. The following pertains to the
annual cash flows using the machine:
Year
Net cash inflows
1
P1,750
2
2,250
3
2,850
4
3,000
5
3,250
A. Compute for the company’s payback period.
B. Compute for the company’s payback reciprocal.
4.
Henerhiya Co. is planning to buy a machine costing
P84,000 to be depreciated on the straight line method
basis over 10 years life. The related cash flow from
operations, net of income taxes, is expected to be
P10,000 a year for each of the first 6 years and P12,000
for the next 4 years. It was also estimated that the
salvage value of the project at the end of year 1 to be
P60,000 and decreases by P5,000 each year thereafter,
provided further that at the end of 10 years, the machine
has no salvage value. Compute the payback bailout. 3.9
5.
Hanchets Inc. is considering the purchase of a new
vehicle for P350,000. The firm's old vehicle has a book
value of P85,000, but can only be sold for P60,000. It
was being depreciated at the rate of P13,500 per year for
four more years under an old depreciation method.
The new vehicle will be depreciated using the 5-year
using the straight line method. It is expected to save
P62,000 after taxes through reduced fuel and
maintenance expenses. Tabletop Ranch is in the 34%
tax bracket and has a 12% cost of capital. Assume a 6
year time horizon. Compute for the accounting rate of
return. 5.78%