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ADMS3530 - W2021 - Midterm 2 Tutorial - QUESTIONS

ADMS3530 Suncor can buy a new, very efficient, wind turbine machine for $20 million. It will cost$350,000 per year to operate but will

1.Hindenburg has issued preferred stock with a $5 annual dividend that will be paidin perpetuity. If the discount rate is 5 percent, at what price should the stock sellone year from now?

a.$10

b.$50

c.$100

d.$105

e.$110

2.BCE just paid a $3.80 annual dividend. The company has a policy whereby thedividend increases by 5.0 percent annually. You would like to purchase 1000shares of stock in this company but realize that you will not have the funds to doso for another three years. If you require a 10 percent rate of return, how muchshould you expect to pay for 1000 shares when you can afford to buy this stock? ADMS3530

a.$76,000

b.$87,980

c.$90,100

d.$92,378

e.$98,547

3.The expected EPS (earnings per share) of Kamal inc. is $5 and the companyusually retains 70% of its earnings. Kamal inc. has a discount rate of 16%,and a return on equity (ROE) of 20%. What is Kamal inc. current stock price?Constant growth

a.$1.25

b.$60.75

c.$70

d.$75

c.$175

4.Suppose that Molson Coors is expected to pay a dividend next year of $2.00 pershare. Both sales and profits for Molson Coors are expected to grow at a rate of15% for the following two years and then at 2% per year thereafter indefinitely.Dividend growth is expected to match sales growth. If the required return is 10%,what is the value of a share of Molson Coors? ADMS3530

a.$3.05

b.$31.04

c.$33.07

d.$33.72

e.$35.70

5.At what discount rate would you be indifferent between accepting and rejecting aproject which costs $8,500 today with annual cash flows of $1,750 for the nextnine years?

a.13.50%

b.14.00%

c.14.50%d.

d.15.00%

e.15.50%

6.The profitability index for a project costing $50,000 and returning $18,000annually for four years at an opportunity cost of capital of 14 percent is:

a. .0466

b. .0489

c. .0611

d .5

e. .1958

7.You can continue to use your less efficient machine at a cost of $8,000 annuallyfor the next five years. Alternatively, you can purchase a more efficient machinefor $12,000 plus $5,000 annual maintenance for the next five years. At a cost ofcapital of 15 percent, you should: ADMS3530

a.Buy the new machine and save $388 in equivalent annual costs.

b.Buy the new machine and save $600 in equivalent annual costs.

c.Keep the old machine and save $388 in equivalent annual costs.

d.Keep the old machine and save $580 in equivalent annual costs.

Suncor can buy a new, very efficient, wind turbine machine for $20 million. It will cost$350,000 per year to operate but will save Suncor $3,000,000 annually in operatingexpense and will be useful for 10 years. The turbine will have a salvage value of$3,000,000 at the end of 10 years. Suncor’s discount rate is 10% and their tax rate is20%. The machine falls into a 25% CCA asset class, declining balance method, and thehalf-year rule applies (the asset was purchased before 2018).

8.What is the present value of the project’s after-tax cash flows from operations(excluding the present value of the CCA tax shields) over the project’s life?

a.11,125,984

b.13,026,482

c.14,329,130

d.16,283,103

e.20,000,000

9.What is the present value of the CCA tax shields over the project’s life?

a.2,105,451

b.2,310,040

c.2,562,040

d.2,727,272

e2,821,780

10.What is the NPV of purchasing the new machine? ADMS3530

a.-4,411,478

b.-3,254,848

c.0

d.3,254,848

e.4,411,478

11.Calculate the NPV break-even level of sales for a project requiring an investmentof $3,250,000 and providing annual cash flows as follows: 0.20 x Sales -$350,000. Assume the project will last 8 years and that the discount rate is 5%.

a.$2,514,229

b.$4,144,504

c.$4,182,623

d.$4,264,229

e.$5,235,128

12.What is the accounting break-even level, in sales dollars, based on the following

project data: ADMS3530

Sales price is $5.5 per unit

Variable cost is $3 per unit

Fixed cost is $450 per year

Required rate of return is 5%

Initial Investment of $2,000 is depreciated over the project life of 8 years

(straight line, assume the half-year rule does not apply).

a.$990

b.$1,540

c.$1,940

d.$2,090

e.$5,390

13.A firm has a DOL = 3.0. If sales decrease by 25%, then profit will ____________.

a.decrease by 75%

b.increase by 50%

c.increase by 75%

d.decrease by 12.5%

e.decrease by 50%

14.The total rate of return on a stock can be positive even when the price of the

stock falls because of the: ADMS3530

a.Capital appreciation.

b.Interest paid.

c.Dividend yield.

dNon-constant growth.

e.Real rate of return.

15.The purpose of sensitivity analysis is to show:

a.The optimal level of the capital budget.

b.How price changes affect break-even volume.

c.Seasonal variation in product demand.

d.How variables in a project affect profitability.

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