# 10 mcs on capital budgeting issues

1. Senbet Ventures is considering starting a new company to produce stereos. The sales price would be set at 1.5 times the variable cost per unit; the VC/unit is estimated to be \$2.50; and fixed costs are estimated at \$120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the stereo business? (Points : 2)       86,640
91,200
96,000
100,800

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 Question 2. 2. O’Brien Inc. has the following data:  rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of common from retained earnings based on the CAPM? (Points : 2)

11.30%
11.64%
11.99%
12.35%

 Question 3. 3. Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = \$1.45; P0 = \$22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from retained earnings? (Points : 2)

11.10%
11.68%
12.30%
12.94%

 Question 4. 4. A company’s perpetual preferred stock currently sells for \$92.50 per share, and it pays an \$8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s cost of preferred stock? (Points : 2)

7.81%
8.22%
8.65%
9.10%

 Question 5. 5. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = \$0.67; P0 = \$27.50; and g = 8.00% (constant). What is the cost of common from retained earnings based on the DCF approach? (Points : 2)

9.42%
9.91%
10.44%
10.96%

 Question 6. 6. When working with the CAPM, which of the following factors can be determined with the most precision? (Points : 2)

The beta coefficient, bi, of a relatively safe stock.
The most appropriate risk-free rate, rRF.
The expected rate of return on the market, rM.

 Question 7. 7. Which of the following statements is CORRECT? (Points : 2)

The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects.
The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects.

 Question 8. 8. No conflict will exist between the NPV and IRR methods, when used to evaluate two equally risky but mutually exclusive projects, if the projects’ cost of capital exceeds the rate at which the projects’ NPV profiles cross. (Points : 2)

True
False

 Question 9. 9. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. (Points : 2)

The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.
One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.
If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.
The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

 Question 10. 10. Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? (Points : 2)

Long-term debt.
Accounts payable.
Retained earnings.
Common stock.

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