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BUS 401 Week 3 Quiz

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This exam consists of 10 multiple choice and true/false questions questions.

1. Question : Jiffy Wax Corp. Can sell common stock for $15 per share and its investors require a 14 % return. However, the administrative or flotation costs associated with selling the stock amount to $2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling preferred stock?

2. Question : Kinslow Manufacturing Company paid a dividend yesterday of $2.50 per share. The dividend is expected to grow at a constant rate of 5% per year. The price of Kinslow’s common stock today is $25 per share. If Kinslow decides to issue new common stock, flotation costs will equal $2.00 per share. Key’s marginal tax rate is 34 %. Based on the above information, the cost of retained earnings is ________ 3. Question : Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5 year useful life and will be depreciated using the straight line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $ 10,000 annually. Nickel’s income tax rate is 40%. What is the projected incremental cash flow of the machine or year 1?


4. Question : Nargo Inc. Wants to replace a 7 year old machine with a new machine that is more efficient. The old machine cost $50,000 when new and has a current book value of $10,000. Margo can sell the machine to a foreign buyer for $12,000. Margo’s tax rate is 30%. The effect of the sale of the old machine on the initial outlay for the new machine is ________ 5. Question : A capital budgeting project has a net present value of $10,000 and a modified internal rate of return of 13%. The project's required rate of return is 11 %. The internal rate of return is ______ 6. Question : Higgins Office Corp. Plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt - 8 percent; preferred stock- 12 percent; common equity- 16 percent. Assuming a 40 percent marginal tax rate, what after tax rate of exchange must Higgins Office Corp. Earn on its investments if the value of the firm is to remain unchanged? 7. Question : Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs $ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The internal rate of return for Project B is ________ 8. Question : A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5 years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes?

9. Question : Project A costs

Zellar’s, Inc. Is considering two mutually exclusive projects, A and B.

$ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The profitability index for Project B is ________


10. Question : Jones Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company’s after tax cost of debt is 8%, its cost of preferred debt is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company’s marginal tax rate is 35%. What is the company’s weighted average cost of capital if retained earnings are used to fund the common equity portion?


Bus 401 week 3 quiz