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Question
Tantasqua Paper Products is composed of 3 divisions: industrial paper products, commercial paper products, and a forestry division which grows trees for wood pulp used in the paper-making process. Each of these divisions takes on a large number of projects with differing risk characteristics. Tantasqua now uses a single discount rate based on the company's WACC to evaluate all capital budgeting proposals. Discuss the advantages and disadvantages of this approach.Answer
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Related questions
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A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the following will not change if the required rate of return is increased from 10% to 12%.
A) The net present value.
B) The internal rate of return.
C) The profitability index.
D) The modified internal rate of return.
Q:
Initial Outlay Cash Flow in Period
1 2 3 4
-$4,000 $1,546.17 $1,546.17 $1,546.17 $1,546.17
The IRR (to the nearest whole percent) is:
A) 10%.
B) 18%.
C) 20%.
D) 16%.
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Dieyard Battery Recyclers is considering a project with the following cash flows:
Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
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The equivalent annual cost method is most appropriate in which of the following situations? In each case, assume that several mutually exclusive options are available.
A) Introducing a new product line
B) Adding another store to a chain of retail stores
C) Installation of federally mandated safety equipment
D) Equipment to reduce production costs
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WSU Inc. has various options for replacing a piece of manufacturing equipment. The present value of costs for option Ell is $84,000. Option Ell has a useful life of 5 years; annual operating costs were discounted at 9%. What is the equivalent annual cost?
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C) $416,912
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Project EH! requires an initial investment of $50,000, and has a net present value of $12,000. Project BE requires an initial investment of $100,000, and has a net present value of $13,000. The projects are mutually exclusive. The firm should accept:
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B) project BE.
C) both projects.
D) neither project.
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Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
A) In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.
B) The project would add value to the firm.
C) Under all conditions, the project's payback would be less than the profitability index.
D) Other investment criteria might need to be considered.
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The size of capital investments and the difficulty in reversing them once they are made make capital-budgeting decisions very important to the firm.
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Competitive market forces make it imperative for a firm to have a systematic strategy for generating capital-budgeting projects.
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Good capital investment opportunities are most likely to exist when:
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B) interest rates are high and rising.
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B) $15
C) $20
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P/E ratios found in published sources or on the internet are always computed by dividing the next period's expected earnings into the current price of the stock.
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Apple stock is now selling for $315.32 per share. The P/E ratio based on current earnings is 23.72 and the P/E ratio based on expected earnings is 17.48. The expected growth rate in Apples earnings must be:
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B) 36%.
C) 7.6%.
D) 5.5%.
Q:
If the ROE on a new investment is less than the firm's required rate of return:
A) the investment increases the firm's value.
B) the investment leaves the firm's value unchanged.
C) the effect on the firm's value is unpredictable.
D) the investment reduces the firm's value.
Q:
McDonald's stock currently sells for $77.50. It's expected earnings per share are $4.50. The average P/E ratio for the industry is 23.3. If investors expected the same growth rate and risk for McDonald's as for an average firm in the same industry, it's stock price would:
A) stay about the same.
B) rise.
C) fall.
D) there is not enough information.
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B) 14.
C) 2.14.
D) 30.
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Which of the following factors will influence a firm's P/E ratio?
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B) Firm investment opportunities
C) General market conditions
D) All of the above
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Draper Company's common stock paid a dividend last year of $3.70. You believe that the long-term growth in the dividends of the firm will be 8% per year. If your required return for Draper is 14%, how much are you willing to pay for the stock?
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Kelly owns 10,000 shares in McCormick Spices, which currently has 500,000 shares outstanding. The stock sells for $86 on the open market. McCormick's management has decided on a 2-1 split.
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By virtue of its nature, dividend policy is inherently a wealth-creating activity for the firm's owners.
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Dividend payout ratios are generally much lower for small or newly established firms than for large, publicly owned firms.
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The dividend declaration date is the date at which the stock transfer books are to be closed for determining the investor to receive the next dividend payment.
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The ________ designates the date on which the stock transfer books are closed in regard to a dividend payment.
A) declaration date
B) ex-dividend date
C) date of record
D) payment date
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Five years ago, Mr. Martinez purchased 1000 shares of JPM stock at $50 per share. If Mr. Martinez ' tax rate is 25% would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?
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B) It would make no difference because he would receive $5,000 either way.
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D) It would make no difference because the tax rate on dividends is the same as the tax rate on capital gains.
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For accounting purposes, a stock split has been defined as a stock dividend exceeding:
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B) 35%.
C) 45%.
D) 55%.
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A stock dividend will cause changes in the dollar value of which of the below capital accounts?
A) Common stock
B) Additional paid-in capital
C) Retained earnings
D) All of the above
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A) There is not enough information to know.
B) EPS will increase by 10%.
C) EPS will not be affected by the stock dividend.
D) EPS will decrease by 10%.