Question 1

Treasury stocks are stocks sold by U.S Department of Treasury.

Accepted Answer

A) True 
 B)False  False

Question 2

The cost of capital is average interest rate from all sources of funds generated by a company.

Accepted Answer

A) True 
 B)False  True

Question 3

The opportunity cost is the rate of return on the best rejected project.

Accepted Answer

A) True 
 B)False  True

Question 4

Case Study 15.2
A distributing company has financed an expansion requiring $50 million as shown in table below even though historically the company has financed any capital requirement with 20% debt at 12% interest and 80% equity with a 8% rate of return.
 $$\begin{array} { | l | l | l | } 
\hline \text { Source of capital } & \text { Amuunt } & \text { Interest Rate/ Dividend } \
\hline \text { Stocks } & \$ 16 \mathrm { M } & 8 \% \
\hline \text { Retaired eariirgs } & \$ 25 \mathrm { M } & 10 \% \
\hline \text { Bonds } & \$ 9 \mathrm { M } & 6 \% \
\hline
\end{array}$$
-What is the weighted average cost of capital based on current financing?

Accepted Answer

A)  6.4% 
B)  8.2% 
C)  8.64% 
D)  9.3% 
A)  6.4% 
B)  8.2% 
C)  8.64% 
D)  9.3%

Question 5

The after-tax cost of capital for borrowed amount at a 10% interest rate is 7.5% if the corporate income-tax rate is 25%

Accepted Answer

A) True 
 B)False

Question 6

Case Study 15.1
A Publically traded company has issued $50M worth of stocks. The stock holders expect a rate of return of 12%. The company has a bank loan at an interest rate of 10% worth $12M. The company has sold bonds worth $20M at a rate of 6% compounded yearly.
-Determine the before tax cost of capital for the company.

Accepted Answer

A)  10.63% 
B)  9.32% 
C)  10.24% 
D)  None of these 
A)  10.63% 
B)  9.32% 
C)  10.24% 
D)  None of these

Question 7

Case Study 15.1
A Publically traded company has issued $50M worth of stocks. The stock holders expect a rate of return of 12%. The company has a bank loan at an interest rate of 10% worth $12M. The company has sold bonds worth $20M at a rate of 6% compounded yearly.
-What is the after tax cost of capital if the company is in the 34% income tax bracket.

Accepted Answer

A)  9.25% 
B)  6.2% 
C)  7.02% 
D)  None of these 
A)  9.25% 
B)  6.2% 
C)  7.02% 
D)  None of these

Question 8

Case Study 15.2
A distributing company has financed an expansion requiring $50 million as shown in table below even though historically the company has financed any capital requirement with 20% debt at 12% interest and 80% equity with a 8% rate of return.
 $$\begin{array} { | l | l | l | } 
\hline \text { Source of capital } & \text { Amuunt } & \text { Interest Rate/ Dividend } \
\hline \text { Stocks } & \$ 16 \mathrm { M } & 8 \% \
\hline \text { Retaired eariirgs } & \$ 25 \mathrm { M } & 10 \% \
\hline \text { Bonds } & \$ 9 \mathrm { M } & 6 \% \
\hline
\end{array}$$
-What is the weighted average cost of capital based on historical method?

Accepted Answer

A)  5.8% 
B)  7.9% 
C)  8.2% 
D)  8.80% 
A)  5.8% 
B)  7.9% 
C)  8.2% 
D)  8.80%

Question 9

A medium size manufacturing company has a budget of $200,000 to invest on five different capital projects. Each has a six year life. Additional financial data for the five project opportunities are given below.
$$\begin{array} { | l | l | l | l | l | l | } 
\hline & \mathbf { A } & \mathbf { B } & \mathrm { C } & \mathrm { D } & \mathrm { E } \
\hline \text { Initial Cost } & \$ 50 \mathrm {~K} & \$ 80 K & \$ 30 K & \$ 40 \mathrm {~K} & \$ 60 \mathrm {~K} \
\hline \text { EUAB } & 12,160 & 18,368 & 7,932 & \mathbf { 8 } 652 & 13,374 \
\hline
\end{array}$$ Determine which projects should be funded.

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Treasury stocks are stocks sold by U.S Department of Treasury.

The cost of capital is average interest rate from all sources of funds generated by a company.

The opportunity cost is the rate of return on the best rejected project.

The after-tax cost of capital for borrowed amount at a 10% interest rate is 7.5% if the corporate income-tax rate is 25%

Making Economic Decisions

Estimating Engineering Costs and Benefits

Interest and Equivalence

Equivalence for Repeated Cash Flows

Present Worth Analysis

Annual Cash Flow Analysis

Rate of Return Analysis

Choosing the Best Alternative

Other Analysis Techniques

Uncertainty in Future Events

Depreciation

Income Taxes for Corporations

Replacement Analysis

Inflation and Price Change

Economic Analysis in the Public Sector

Accounting and Engineering Economy

Filters

Exam 15: Selection of a Minimum Attractive Rate of Return

Treasury stocks are stocks sold by U.S Department of Treasury.

The cost of capital is average interest rate from all sources of funds generated by a company.

The opportunity cost is the rate of return on the best rejected project.

The after-tax cost of capital for borrowed amount at a 10% interest rate is 7.5% if the corporate income-tax rate is 25%

Making Economic Decisions

Estimating Engineering Costs and Benefits

Interest and Equivalence

Equivalence for Repeated Cash Flows

Present Worth Analysis

Annual Cash Flow Analysis

Rate of Return Analysis

Choosing the Best Alternative

Other Analysis Techniques

Uncertainty in Future Events

Depreciation

Income Taxes for Corporations

Replacement Analysis

Inflation and Price Change

Economic Analysis in the Public Sector

Accounting and Engineering Economy

Filters