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[Solved] The market risk premium remains constant over time because the risk free

Page:of 2 Automatic Zoom Actual Size ... [Show More] Page Fit Page Width 50% 75% 100% 125% 150% 200% 300% 400% Financial Management Question: Q2. JPR Company is financed 75 percent by equity and 25 percent by debt. If the firm expects to earn $30 million in net income next year and retain 40% of it, how large can the capital budget be before common stock must be sold? Correct Answer: c. $15.5 million Given Answer: d. $16.0 million Question: Q7. The market risk premium remains constant over time because the risk free rate of return moves inversely with beta. Correct Answer: b. False Given Answer: a. True Question: Q18. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. The profitability index for Project A is Correct Answer: a. 1.27. Given Answer: b. 1.22. Question: Q21. Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5- year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one? Correct Answer: d. $24,220 Given Answer: c. $22,305 Question: Q23. The recapture of net working capital at the end of a project will Correct Answer: a. increase terminal year free cash flow. Given Answer: c. increase terminal year free cash flow by the change in net working capital times the corporate tax rate. Question: Q26. The less-risky investment is always the more desirable choice. Correct Answer: b. False Thanks for rating! You should receive an unlock shortly. Given Answer: a. True Question: Q34. Raising funds internally is effectively increasing the investment of the firm's existing common shareholders. Correct Answer: a. True Given Answer: b. False Question: Q39. Which of the following transactions will lower a company's financial leverage? Correct Answer: c. Common stock is sold and the proceeds are used to pay off existing short-term debt. Given Answer: b. Preferred stock is sold and the proceeds are used to pay off existing short-term debt. Question: Q42. Concentric Corporation has 10 million shares of stock outstanding. Concentric's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18, for a stock price of $252 per share. Concentric's management issues a 40% stock dividend. What is the effect on an investor who owns 100 shares of Concentric before the dividend if Concentric's price-earnings multiple remains the same after the dividend is paid? Correct Answer: a. The investor will own 140 shares worth $25,200. Given Answer: b. The investor will own 140 shares worth $35,280. Question: Q43. As long as a firm has a positive level of retained earnings, it can pay a dividend. Correct Answer: b. False Given Answer: a. True Question: Q45. The correct order of dividend process dates is Correct Answer: d. declaration date, ex-dividend date, date of record, payment date. Given Answer: b. declaration date, date of record, ex-dividend date, payment date. Question: Q46. Assume that the tax on dividends and the tax on capital gains is the same. All else equal, what would a prudent investor prefer? Correct Answer: c. The prudent investor would prefer capital gains?the capital gain tax liability can be deferred until gains are realized. Given Answer: b. The prudent investor would prefer dividends?a dollar today is always worth more than a dollar to be received in the future. [Show Less]

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