Falcon Associates is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone?
WACC: 10%
Year: 0 1 2 3 4
CFs: -$1,025 $650 $450 $250 $50
CFl: -$1,025 $100 $300 $500 $700
A. $6.02
B. $5.47
C. $6.62
D. $7.82
E. $7.29
Which of the following statements is CORRECT?
A. The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
B. The capital structure that minimizes the required return on equity also maximizes the stock price.
C. The capital structure that minimizes the WACC also maximizes the price per share of common stock.
D. The capital structure that maximizes expected EPS also maximizes the price per share of common stock.
E. The capital structure that gives the firm the best bond rating also maximizes the stock price.
Which of the following statements is CORRECT?
A. The regular payback does not consider cash flows beyond the payback year, but the discounted payback overcomes this defect.
B. The regular payback method recognizes all cash flows over a project’s life.
C. The regular payback is useful as an indicator of a project’s liquidity because it gives managers an idea of how long it will take to recover the funds invested in a project.
D. The discounted payback method recognizes all cash flows over a project’s life, and it also adjusts these cash flows to account for the time value of money.
E. The regular payback method was, years ago, widely used, but virtually no companies even calculate the payback today.
As assistant to the CFO of Falcon Fitness Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?
Sales revenues $13,000
Depreciation $4,000
Other operating costs $6,000
Tax rate 35.0%
A. $6,251
B. $6,407
C. $5,950
D. $6,568
E. $6,099
