MECH 3330 Project 2 Due 12116 Design a tube bank that .docx

MECH 3330 Project 2 Due: 12/1/16
Design a tube bank that will increase the temperature of a 1200
CFM flow of air from 35⁰F to
100⁰F. Assume a constant pressure of 1atm. Each tube will
have a diameter of 0.5in and a
length of 24in. The tube configuration must fit in an area of
18in by 18in. Assume reasonable
uniform surface temperature for the outside of the tubes.
Finding will be presented in a report with a memo cover sheet.
A narrative including an
Introduction, Analysis Methods, Results, and Conclusions needs
to be provided.
Introduction: Describe the problem
Analysis Methods: Describe the methods used to analyze the
problem. Include equations used
and any other tools used.
Results: Provide a dimensioned drawing of the design along
with any results obtained from
calculations or other analysis methods. The drawing should
include the tube configuration,

number of tubes, and tub spacing.
Conclusions: Provide a summary of the problem, analysis, and
results. Also discuss what
measurements and controls should be added to insure 100⁰F air
at the exit.
Notes:
The report must be created in a word processing program.
All drawings must be created with a computer aided drafting
program.
Internally Reference all research sources and also include a
reference page
FINAL EXAM MGT 5002
MULTIPLE CHOICE CHAPTER 9
(9-5) Required return
1). If in the opinion of a given investor a stock’s expected
return exceeds its required return, this suggests that the investor
thinks

a. the stock is experiencing supernormal growth.
b. the stock should be sold.
c. the stock is a good buy.
d. management is probably not trying to maximize the price
per share.
e. dividends are not likely to be declared.
(9-1) Preemptive right
2). The preemptive right is important to shareholders because
it
a. allows managers to buy additional shares below the current
market price.
b. will result in higher dividends per share.
c. is included in every corporate charter.
d. protects the current shareholders against a dilution of their
ownership interests.
e. protects bondholders, and thus enables the firm to issue
debt with a relatively low interest rate.
(9-2) Classified stock
3). Companies can issue different classes of common stock.
Which of the following statements concerning stock classes is
CORRECT?
a. All common stocks fall into one of three classes: A, B, and
C.
b. All common stocks, regardless of class, must have the
same voting rights.
c. All firms have several classes of common stock.
d. All common stock, regardless of class, must pay the same

dividend.
e. Some class or classes of common stock are entitled to
more votes per share than other classes.
(9-5) Constant growth model
4). If a stock’s dividend is expected to grow at a constant rate
of 5% a year, which of the following statements is CORRECT?
The stock is in equilibrium.
a. The expected return on the stock is 5% a year.
b. The stock’s dividend yield is 5%.
c. The price of the stock is expected to decline in the future.
d. The stock’s required return must be equal to or less than
5%.
e. The stock’s price one year from now is expected to be 5%
above the current price.
(9-7) Corporate valuation model
5). Which of the following statements is CORRECT?
a. To implement the corporate valuation model, we discount
projected free cash flows at the weighted average cost of
capital.
b. To implement the corporate valuation model, we discount
net operating profit after taxes (NOPAT) at the weighted
average cost of capital.
c. To implement the corporate valuation model, we discount
projected net income at the weighted average cost of capital.
d. To implement the corporate valuation model, we discount
projected free cash flows at the cost of equity capital.
e. The corporate valuation model requires the assumption of
a constant growth rate in all years.

(9-8) Preferred stock concepts
a. A major disadvantage of financing with preferred stock is
that preferred stockholders typically have supernormal voting
rights.
b. Preferred stock is normally expected to provide steadier,
more reliable income to investors than the same firm’s common
stock, and, as a result, the expected after-tax yield on the
preferred is lower than the after-tax expected return on the
common stock.
c. The preemptive right is a provision in all corporate
charters that gives preferred stockholders the right to purchase
(on a pro rata basis) new issues of preferred stock.
d. One of the disadvantages to a corporation of owning
preferred stock is that 70% of the dividends received represent
taxable income to the corporate recipient, whereas interest
income earned on bonds would be tax free.
e. One of the advantages to financing with preferred stock is
that 70% of the dividends paid out are tax deductible to the
issuer.
(9-5) Expected total return
7). If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44,
what is the stock’s expected total return for the coming year?
a. 7.54%
b. 7.73%
c. 7.93%
d. 8.13%
e. 8.34%

Chapter 10 - Multiple Choice
(10-6) Internal vs. external common
8). Bankston Corporation forecasts that if all of its existing
financial policies are followed, its proposed capital budget
would be so large that it would have to issue new common
stock. Since new stock has a higher cost than retained earnings,
Bankston would like to avoid issuing new stock. Which of the
following actions would REDUCE its need to issue new
common stock?
a. Increase the dividend payout ratio for the upcoming year.
b. Increase the percentage of debt in the target capital
structure.
c. Increase the proposed capital budget.
d. Reduce the amount of short-term bank debt in order to
increase the current ratio.
e. Reduce the percentage of debt in the target capital
structure.
(10-5) Cost of equity: CAPM
9). When working with the CAPM, which of the following
factors can be determined with the most precision?
a. The market risk premium (RPM).
b. The beta coefficient, bi, of a relatively safe stock.
c. The most appropriate risk-free rate, rRF.
d. The expected rate of return on the market, rM.
e. The beta coefficient of “the market,” which is the same as
the beta of an average stock.

(10-9) Risk and projects
10). LaPango Inc. estimates that its average-risk projects have a
WACC of 10%, its below-average risk projects have a WACC of
8%, and its above-average risk projects have a WACC of 12%.
Which of the following projects (A, B, and C) should the
company accept?
a. Project B, which is of below-average risk and has a return
of 8.5%.
b. Project C, which is of above-average risk and has a return
of 11%.
c. Project A, which is of average risk and has a return of 9%.
d. None of the projects should be accepted.
e. All of the projects should be accepted.
(10-5) Cost of RE: CAPM
11). O'Brien Inc. has the following data: rRF = 5.00%; RPM =
6.00%; and b = 1.05. What is the firm's cost of equity from
retained earnings based on the CAPM?
a. 11.30%
b. 11.64%
c. 11.99%
d. 12.35%
e. 12.72%
(10-5) Cost of RE: CAPM
12). Scanlon Inc.'s CFO hired you as a consultant to help her

estimate the cost of capital. You have been provided with the
following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30.
Based on the CAPM approach, what is the cost of equity from
retained earnings?
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%
(10-5) Bond-yield-plus-risk premium
13). A. Butcher Timber Company hired your consulting firm to
help them estimate the cost of equity. The yield on the firm's
bonds is 8.75%, and your firm's economists believe that the cost
of equity can be estimated using a risk premium of 3.85% over a
firm's own cost of debt. What is an estimate of the firm's cost
of equity from retained earnings?
a. 12.60%
b. 13.10%
c. 13.63%
d. 14.17%
e. 14.74%
(10-7) WACC
14). You were hired as a consultant to Giambono Company,
whose target capital structure is 40% debt, 15% preferred, and
45% common equity. The after-tax cost of debt is 6.00%, the
cost of preferred is 7.50%, and the cost of retained earnings is
12.75%. The firm will not be issuing any new stock. What is
its WACC?

a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
e. 10.12%
(Comp.) Cost of capital concepts
a. Since debt capital can cause a company to go bankrupt but
equity capital cannot, debt is riskier than equity, and thus the
after-tax cost of debt is always greater than the cost of equity.
b. The tax-adjusted cost of debt is always greater than the
interest rate on debt, provided the company does in fact pay
taxes.
c. If a company assigns the same cost of capital to all of its
projects regardless of each project’s risk, then the company is
likely to reject some safe projects that it actually should accept
and to accept some risky projects that it should reject.
d. Because no flotation costs are required to obtain capital as
retained earnings, the cost of retained earnings is generally
lower than the after-tax cost of debt.
e. Higher flotation costs tend to reduce the cost of equity
capital.
(Comp.) Capital components
a. The component cost of preferred stock is expressed as rp(1
- T). This follows because preferred stock dividends are treated
as fixed charges, and as such they can be deducted by the issuer

for tax purposes.
b. A cost should be assigned to retained earnings due to the
opportunity cost principle, which refers to the fact that the
firm’s stockholders would themselves expect to earn a return on
earnings that were paid out rather than retained and reinvested.
c. No cost should be assigned to retained earnings because
the firm does not have to pay anything to raise them. They are
generated as cash flows by operating assets that were raised in
the past, hence they are “free.”
d. Suppose a firm has been losing money and thus is not
paying taxes, and this situation is expected to persist into the
foreseeable future. In this case, the firm’s before-tax and after-
tax costs of debt for purposes of calculating the WACC will
both be equal to the interest rate on the firm’s currently
outstanding debt, provided that debt was issued during the past
5 years.
e. If a firm has enough retained earnings to fund its capital
budget for the coming year, then there is no need to estimate
either a cost of equity or a WACC.
(11-2) NPV
17). 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.
a. A project’s NPV is found by compounding the cash
inflows at the IRR to find the terminal value (TV), then
discounting the TV at the WACC.
b. The lower the WACC used to calculate it, the lower the

calculated NPV will be.
c. If a project’s NPV is less than zero, then its IRR must be
less than the WACC.
d. If a project’s NPV is greater than zero, then its IRR must
be less than zero.
e. The NPV of a relatively low-risk project should be found
using a relatively high WACC.
(11-3) IRR
a. One defect of the IRR method is that it does not take
account of cash flows over a project’s full life.
b. One defect of the IRR method is that it does not take
account of the time value of money.
c. One defect of the IRR method is that it does not take
account of the cost of capital.
d. One defect of the IRR method is that it values a dollar
received today the same as a dollar that will not be received
until sometime in the future.
e. One defect of the IRR method is that it assumes that the
cash flows to be received from a project can be reinvested at the
IRR itself, and that assumption is often not valid.
(11-8) Payback
that the project being considered has normal cash flows, with
one outflow followed by a series of inflows.

a. The longer a project’s payback period, the more desirable
the project is normally considered to be by this criterion.
b. One drawback of the payback criterion for evaluating
projects is that this method does not properly account for the
time value of money.
c. If a project’s payback is positive, then the project should
be rejected because it must have a negative NPV.
d. The regular payback ignores cash flows beyond the
payback period, but the discounted payback method overcomes
this problem.
e. If a company uses the same payback requirement to
evaluate all projects, say it requires a
payback of 4 years or less, then the company will
tend to reject projects
(11-5) NPV and IRR
a. The NPV method assumes that cash flows will be
reinvested at the WACC, while the IRR method assumes
reinvestment at the IRR.
b. The NPV method assumes that cash flows will be
reinvested at the risk-free rate, while the IRR method assumes
reinvestment at the IRR.
c. The NPV method assumes that cash flows will be
reinvested at the WACC, while the IRR method assumes
reinvestment at the risk-free rate.
d. The NPV method does not consider all relevant cash flows,
particularly cash flows beyond the payback period.
e. The IRR method does not consider all relevant cash flows,
particularly cash flows beyond the payback period.
(Comp.) Miscellaneous concepts

a. The IRR method appeals to some managers because it
gives an estimate of the rate of return on projects rather than a
dollar amount, which the NPV method provides.
b. The discounted payback method eliminates all of the
problems associated with the payback method.
c. When evaluating independent projects, the NPV and IRR
methods often yield conflicting results regarding a project's
acceptability.
d. To find the MIRR, we discount the TV at the IRR.
e. A project’s NPV profile must intersect the X-axis at the
project’s WACC.
(11-7) NPV profiles
that all projects being considered have normal cash flows and
are equally risky.
a. If a project’s IRR is equal to its WACC, then, under all
reasonable conditions, the project’s NPV must be negative.
b. If a project’s IRR is equal to its WACC, then under all
reasonable conditions, the project’s IRR must be negative.
c. If a project’s IRR is equal to its WACC, then under all
reasonable conditions the project’s NPV must be zero.
d. There is no necessary relationship between a project’s
IRR, its WACC, and its NPV.
e. When evaluating mutually exclusive projects, those
projects with relatively long lives will tend to have relatively
high NPVs when the cost of capital is relatively high.
Chapter 12 Multiple choice
(12-1) Sunk costs

a. A sunk cost is any cost that must be expended in order to
complete a project and bring it into operation.
b. A sunk cost is any cost that was expended in the past but
can be recovered if the firm decides not to go forward with the
project.
c. A sunk cost is a cost that was incurred and expensed in the
past and cannot be recovered if the firm decides not to go
forward with the project.
d. Sunk costs were formerly hard to deal with, but once the
NPV method came into wide use, it became possible to simply
include sunk costs in the cash flows and then calculate the
project’s NPV.
e. A good example of a sunk cost is a situation where Home
Depot opens a new store, and that leads to a decline in sales of
one of the firm’s existing stores.
(12-1) Relevant cash flows
24). Which of the following factors should be included in the
cash flows used to estimate a project’s NPV?
a. All costs associated with the project that have been
incurred prior to the time the analysis is being conducted.
b. Interest on funds borrowed to help finance the project.
c. The end-of-project recovery of any additional net
operating working capital required to operate the project.
d. Cannibalization effects, but only if those effects increase
the project’s projected cash flows.
e. Expenditures to date on research and development related
to the project, provided those costs have already been expensed
for tax purposes.
(12-1) Incremental cash flows
25). Which one of the following would NOT result in
incremental cash flows and thus should NOT be included in the
capital budgeting analysis for a new product?

a. A firm has a parcel of land that can be used for a new plant
site or be sold, rented, or used for agricultural purposes.
b. A new product will generate new sales, but some of those
new sales will be from customers who switch from one of the
firm’s current products.
c. A firm must obtain new equipment for the project, and $1
million is required for shipping and installing the new
machinery.
d. A firm has spent $2 million on research and development
associated with a new product. These costs have been expensed
for tax purposes, and they cannot be recovered regardless of
whether the new project is accepted or rejected.
e. A firm can produce a new product, and the existence of
that product will stimulate sales of some of the firm’s other
products.
(12-4) Risk analysis
26). Taussig Technologies is considering two potential projects,
X and Y. In assessing the projects’ risks, the company
estimated the beta of each project versus both the company’s
other assets and the stock market, and it also conducted
thorough scenario and simulation analyses. This research
produced the following data:
Project X
Project Y
Expected NPV
$350,000
$350,000
Standard deviation (σNPV)
$100,000
$150,000
Project beta (vs. market)
1.4
0.8

Correlation of the
project cash flows with
cash flows from currently
existing projects
Cash flows are not
correlated with the
cash flows from
existing projects
Cash flows are highly
correlated with the
cash flows from
existing projects
Which of the following statements is CORRECT?
a. Project X has more stand-alone risk than Project Y.
b. Project X has more corporate (or within-firm) risk than
Project Y.
c. Project X has more market risk than Project Y.
d. Project X has the same level of corporate risk as Project Y.
e. Project X has the same market risk as Project Y since its
cash flows are not correlated with the cash flows of existing
projects.
(12-4) Project's effect on firm risk
27). A firm is considering a new project whose risk is greater
than the risk of the firm’s average project, based on all methods
for assessing risk. In evaluating this project, it would be
reasonable for management to do which of the following?
a. Increase the estimated IRR of the project to reflect its
greater risk.
b. Increase the estimated NPV of the project to reflect its

greater risk.
c. Reject the project, since its acceptance would increase the
firm’s risk.
d. Ignore the risk differential if the project would amount to
only a small fraction of the firm’s total assets.
e. Increase the cost of capital used to evaluate the project to
reflect its higher-than-average risk.
(12-2) Annual CF
28). As assistant to the CFO of Boulder 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. $5,950
b. $6,099
c. $6,251
d. $6,407
e. $6,568
(13-5) Flexibility option
29). Which one of the following is an example of a “flexibility”
option?
a. A company has an option to invest in a project today or to

wait for a year before making the commitment.
b. A company has an option to close down an operation if it
turns out to be unprofitable.
c. A company agrees to pay more to build a plant in order to
be able to change the plant's inputs and/or outputs at a later date
if conditions change.
d. A company invests in a project today to gain knowledge
that may enable it to expand into different markets at a later
date.
e. A company invests in a jet aircraft so that its CEO, who
must travel frequently, can arrive for distant meetings feeling
less tired than if he had to fly a commercial airline.
(13-6) Risk and project selection
30). Langston Labs has an overall (composite) WACC of 10%,
which reflects the cost of capital for its average asset. Its assets
vary widely in risk, and Langston evaluates low-risk projects
with a WACC of 8%, average-risk projects at 10%, and high-
risk projects at 12%. The company is considering the following
projects:
ProjectRiskExpected Return
A High 15%
B Average 12%
C High 11%
D Low 9%
E Low 6%
Which set of projects would maximize shareholder wealth?
a. A and B.
b. A, B, and C.
c. A, B, and D.
d. A, B, C, and D.

e. A, B, C, D, and E.
(Comp.) Real options
31). Which one of the following will NOT increase the value of
a real option?
a. Lengthening the time during which a real option must be
exercised.
b. An increase in the volatility of the underlying source of
risk.
c. An increase in the risk-free rate.
d. An increase in the cost of obtaining the real option.
e. A decrease in the probability that a competitor will enter
the market of the project in question.
(Comp.) Real options
32). Gleason Research regularly takes real options into account
when evaluating its proposed projects. Specifically, it
considers the option to abandon a project whenever it turns out
to be unsuccessful (the abandonment option), and it evaluates
whether it is better to invest in a project today or to wait and
collect more information (the investment timing option).
Assume the proposed projects can be abandoned at any time
without penalty. Which of the following statements is
CORRECT?
a. The abandonment option tends to reduce a project's NPV.
b. The abandonment option tends to reduce a project's risk.
c. If there are important first-mover advantages, this tends to
increase the value of waiting a year to collect more information
before proceeding with a proposed project.
d. A project can either have an abandonment option or an
investment timing option, but never both.
e. Investment timing options always increase the value of a

project.
(13-2) Growth option: NPV
33). Tutor.com is considering a plan to develop an online
finance tutoring package that has the cost and revenue
projections shown below. One of Tutor's larger competitors,
Online Professor (OP), is expected to do one of two things in
Year 5: (1) develop its own competing program, which will put
Tutor's program out of business, or (2) offer to buy Tutor's
program if it decides that this would be less expensive than
developing its own program. Tutor thinks there is a 35%
probability that its program will be purchased for $6 million
and a 65% probability that it won't be bought, and thus the
program will simply be closed down with no salvage value.
What is the estimated net present value of the project (in
thousands) at a WACC = 10%, giving consideration to the
potential future purchase?
WACC = 10.0% 0 1 2 3 4 5
Original project: -$3,000 $500 $500 $500 $500 $500
Future Prob.
Buys 35% $6,000
Doesn't buy 65% $0
a. $161.46
b. $179.40
c. $199.33
d. $219.26
e. $241.19

(14-2) Business risk
34). An increase in the debt ratio will generally have no effect
on which of these items?
a. Business risk.
b. Total risk.
c. Financial risk.
d. Market risk.
e. The firm's beta.
(14-3) Optimal capital structure
35). Based on the information below, what is the firm's optimal
capital structure?
a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price =
$26.50.
b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price =
$28.90.
c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price =
$31.20.
d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price =
$30.40.
e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price =
$30.00.
(14-5) Leverage and cap. struct.
36). Which of the following events is likely to encourage a
company to raise its target debt ratio, other things held
constant?
a. An increase in the corporate tax rate.
b. An increase in the personal tax rate.
c. An increase in the company’s operating leverage.
d. The Federal Reserve tightens interest rates in an effort to

fight inflation.
e. The company's stock price hits a new high.
(14-3) Target capital structure
37). The firm’s target capital structure should do which of the
following?
a. Maximize the earnings per share (EPS).
b. Minimize the cost of debt (rd).
c. Obtain the highest possible bond rating.
d. Minimize the cost of equity (rs).
e. Minimize the weighted average cost of capital (WACC).
(14-5) Leverage and cap. struct.
38). Which of the following statements is CORRECT, holding
other things constant?
a. Firms whose assets are relatively liquid tend to have
relatively low bankruptcy costs, hence they tend to use
relatively little debt.
b. An increase in the personal tax rate is likely to increase
the debt ratio of the average corporation.
c. If changes in the bankruptcy code make bankruptcy less
costly to corporations, then this would likely lead to lower debt
ratios for corporations.
d. An increase in the company’s degree of operating leverage
would tend to encourage the firm to use more debt in its capital
structure so as to keep its total risk unchanged.
e. An increase in the corporate tax rate would in theory
encourage companies to use more debt in their capital
structures.

(14-2) Capital struct. concepts
a. In general, a firm with low operating leverage also has a
small proportion of its total costs in the form of fixed costs.
b. There is no reason to think that changes in the personal tax
rate would affect firms’ capital structure decisions.
c. A firm with a relatively high business risk is more likely
to increase its use of financial leverage than a firm with low
business risk, assuming all else equal.
d. If a firm's after-tax cost of equity exceeds its after-tax cost
of debt, it can always reduce its WACC by increasing its use of
debt.
e. Suppose a firm has less than its optimal amount of debt.
Increasing its use of debt to the point where it is at its optimal
capital structure will decrease the costs of both debt and equity.
(14-2) Break-even analysis
40). Longstreet Inc. has fixed operating costs of $470,000,
variable costs of $2.80 per unit produced, and its product sells
for $4.00 per unit. What is the company's break-even point,
i.e., at what unit sales volume would income equal costs?
a. 391,667
b. 411,250
c. 431,813
d. 453,403
e. 476,073
41). Southwest U's campus book store sells course packs for
$15 each, the variable cost per pack is $9, fixed costs to

produce the packs are $200,000, and expected annual sales are
50,000 packs. What are the pre-tax profits from sales of course
packs?
a. $ 72,900
b. $ 81,000
c. $ 90,000
d. $100,000
e. $110,000
42). Your uncle is considering investing in a new company that
will produce high quality stereo speakers. The sales price
would be set at 1.5 times the variable cost per unit; the variable
cost per unit is estimated to be $75.00; and fixed costs are
estimated at $1,200,000. What sales volume would be required
to break even, i.e., to have EBIT = zero?
a. 28,880
b. 30,400
c. 32,000
d. 33,600
e. 35,280
(15-3) Dividend payout
43). In the real world, dividends
a. are usually more stable than earnings.

b. fluctuate more widely than earnings.
c. tend to be a lower percentage of earnings for mature firms.
d. are usually changed every year to reflect earnings changes,
and these changes are randomly higher to lower, depending on
whether earnings increased or decreased.
e. are usually set as a fixed percentage of earnings, e.g., at
40% of earnings, so if EPS = $2.00, then DPS would equal
$0.80. Once the percentage is set, then dividend policy is on
“automatic pilot” and the dividend actually paid depends
strictly on earnings.
(15-6) Stock split
44). You own 100 shares of Troll Brothers' stock, which
currently sells for $120 a share. The company is about to
declare a 2-for-1 stock split. Which of the following best
describes your likely position after the split?
a. You will have 200 shares of stock, and the stock will trade
at or near $120 a share.
b. You will have 200 shares of stock, and the stock will trade
c. You will have 100 shares of stock, and the stock will trade
d. You will have 50 shares of stock, and the stock will trade
e. You will have 50 shares of stock, and the stock will trade
(15-1) Investors' div. preferences
45). Myron Gordon and John Lintner believe that the required
return on equity increases as the dividend payout ratio is
lowered. Their argument is based on the assumption that

a. investors are indifferent between dividends and capital
gains.
b. investors require that the dividend yield plus the capital
gains yield equal a constant.
c. capital gains are taxed at a higher rate than dividends.
d. investors view dividends as being less risky than potential
future capital gains.
e. investors prefer a dollar of expected capital gains to a
dollar of expected dividends because of the lower tax rate on
capital gains.
(15-5) Factors in div. policy
46). Which of the following would be most likely to lead to a
decrease in a firm's dividend payout ratio?
a. Its earnings become more stable.
b. Its access to the capital markets increases.
c. Its research and development efforts pay off, and it now
has more high-return investment opportunities.
d. Its accounts receivable decrease due to a change in its
credit policy.
e. Its stock price has increased over the last year by a greater
percentage than the increase in the broad stock market averages.
(Comp.) Dividend theories
47). Which of the following statements about dividend policies
is CORRECT?

a. Miller and Modigliani argued that investors prefer
dividends to capital gains because dividends are more certain
than capital gains. They call this the “bird-in-the-hand” effect.
b. One reason that companies tend to favor distributing
excess cash as dividends rather than by repurchasing stock is
that dividends are normally taxed at a lower rate than gains on
repurchased stock.
c. One advantage of dividend reinvestment plans is that they
allow shareholders to delay paying taxes on the dividends that
they choose to reinvest.
d. One key advantage of the residual dividend model is that it
enables a company to follow a stable dividend policy.
e. The clientele effect suggests that companies should follow
a stable dividend policy.
(Comp.) Repurchases and DRIPS
a. One disadvantage of dividend reinvestment plans is that
they increase transactions costs for investors who want to
increase their investment in the company.
b. One advantage of dividend reinvestment plans is that they
enable investors to postpone paying taxes on the dividends
credited to their account.
c. Stock repurchases can be used by a firm that wants to
increase its debt ratio.
d. Stock repurchases make sense if a company expects to
have a lot of profitable new projects to fund over the next few
years, provided investors are aware of these investment
opportunities.
e. One advantage of an open market dividend reinvestment
plan is that it provides new equity capital and increases the
shares outstanding.

(Comp.) Div. policy and repurchases
a. Historically, the tax code has encouraged companies to pay
dividends rather than retain earnings.
b. If a company uses the residual dividend model to
determine its dividend payments, dividend payout will tend to
increase whenever its profitable investment opportunities
increase relatively rapidly.
c. The more a firm's management believes in the clientele
effect, the more likely the firm is to adhere strictly to the
residual dividend model.
d. Large stock repurchases financed by debt tend to increase
expected earnings per share, but they also tend to increase the
firm's financial risk.
e. A dollar paid out to repurchase stock has the same tax
benefit as a dollar paid out in dividends. Thus, both companies
and investors should be indifferent between distributing cash
through dividends and stock repurchase programs.
(15-6) Stock split
50). Mid-State BankCorp recently declared a 7-for-2 stock
split. Prior to the split, the stock sold for $80 per share. If the
firm's total market value is unchanged by the split, what will the
stock price be following the split?
a. $20.63
b. $21.71
c. $22.86
d. $24.00
e. $25.20
Practical Application
**Use Excel to do these problems and paste the answers into

this Word Document - Show all calculations to get full credit**
1) An investment project requires a net investment of $100,000.
The project is expected to generate annual net cash flows of
$28,000 for the next 5 years. The firm's cost of capital is 12%.
Part 1 - Determine the payback period for the project.
Part 2 – Determine the payback period accounting for the
present value of future cash flow (i.e. Present value
calculations). That is do the same thing you did in #1 but
discount the cash flows. Should the project be done? After
considering present value is the 100,000 investment recovered
in 3-4 years, 4-5 years or over 5 years?
2) What is the IRR for a project (answer should be a
percentage) that has a net investment of $14,600 and a single
net cash flow of $25,750 in 5 years?
3) Red Lake Mines, Inc. is considering adoption of a new
project requiring a net investment of $10 million. The project is
expected to generate 5 years of net cash inflows of $5 million
per year. In the project's sixth, and final, year it is expected to
have a net cash outflow of $1 million. What is the project NPV,
using a discount rate of 12%?
4) Zimmer, a manufacturer of modular rooms, plans to expand

its operations in Landshut, Germany. The expansion will cost
$14.5 million and is expected to generate annual net cash flows
of €2.15 million for a period of 12 years and then the operation
will be sold for €1 million (net of taxes). The cost of capital for
the project is 14%. Using a spot exchange rate of $1.25/€ as the
forecast FX rate for the euro for the term of the project,
compute the NPV of this expansion project. Convert the annual
cash flow to Dollars before discounting and give your answer in
Dollars.
5) This problem is a breakeven point (BEP) problem. Dupree
Funds is considering the fees charged by two banks. First
America charges a flat rate of $0.11 per payment and First
Western requires a deposit of $500,000 (that does not pay
interest to Dupree), plus $.05 per payment. What is the number
of payments per year where the costs of the two banks will be
equal? Assume Dupree's cost of funds is 9%.
6) What is the annual tax shield (answer should be in Dollars)
to a firm that has total assets of $80 million and a net worth of
$55 million, if the average interest rate on debt is 8.5% and the
marginal tax rate is 35%?

7) Jason is interested in finding the breakeven point for a new
pump it plans to produce. The price of the pump is $250 and
the variable cost ratio is 50% of the price. Jason calculated that
the fixed costs will be about $400,000. What is the breakeven
point of operations in units?
8) Crown Honda purchased one of its most popular motorcycle
models for 965,000 yen. The FX rate for the yen was 142 yen
per dollar at the time of purchase, but then rose to 171.8 yen by
the time payment was made. What was the dealer’s gain or loss
on the change in rates?
9) Seduak has estimated the costs of debt and equity capital for
various proportions of debt in its capital structure.

% Debt After-tax cost of debt Cost of equity
0% - 13.0%
10 5.4% 13.3
20 5.4 13.8
30 5.8 14.4
40 6.3 15.2
50 7.0 16.0
60 8.2 17.0
Based on these estimates, determine Seduak’s optimal capital
structure
1
Final exam MGT 5002

MECH 3330 Project 2 Due 12116 Design a tube bank that .docx

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