Exam Study Guide

Quiz # 2 – Practice Problems ==> MBA FINA 737 1. The ‘XYZ ‘ company will is beginning a new project. The project requires an initial Investment in fixed assets of $35,000. The assets will have a salvage value of $5,000 at the end of the 5 year project. The asset will be depreciated, straight line, over that period. The impact of the project will be an increase in revenue of $30,000 and cost of $17,000 each year. The working capital of the company will need to be higher than normal by $1,000 each year of the project.

The tax rate is 34 %. What is the operating cash flow? What is the project’s net present value at a 20% discount rate? 2. Your company has 100,000 shares of common stock outstanding with a market price of $30 a share. Last month an annual dividend of $1. 32 per share was paid. The dividend growth rate is 5%. You also have 5,000 bonds outstanding with a face value of $1,000 per bond. The bond carries an 8% coupon rate annual and will mature in 4. 8 years. The bonds are selling at 99% face value.

The company tax rate is 32%. What is the weighted average cost of capital? 3. Pick between these two alternatives? A. )a machine costing $52,000 with a life of 4 years, that increases operating cost by $10,000 per year and B. )a machine costing $40,000 with a life of 5 years, that increases operating cost by $9,000. The tax rate is 34%. The depreciation method is straight line. Whichever machine is purchased will be replaced at the end of the useful life. Which one should be purchased and why?

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