Corporate Finance Quiz
Q1. Renew Inc. is considering a three-year project to manufacture guardrails from recycled plastic. The project requires a $150,000 machine (amortized over three years on a straightline basis), which can be sold for $25,000 at the end of the project. The project will also require an initial additional investment in inventory of $40,000, with the investment in inventory being increased to $50,000 at the beginning of the second year. The project is expected to generate net (before-tax) operating cash flows of $80,000, $90,000 and $100,000 in years 1, 2 and 3, respectively. Renew's tax rate is 36%, its weighted average cost of capital is 21% and the applicable CCA rate on the machine is 20%.
What is the net present value (NPV) of this project?
a) -$18,480
b) -$18,304
c) -$16,568
d) $49,684
Q2. Sally Industries (SI) has decided to replace a major piece of industrial equipment and must now decide how to finance the acquisition. The equipment costs $690,000 to purchase and install and is expected to have a useful life of five years. At that time, it will be sold on the open market and is expected to have a salvage value of $200,000.
The new equipment will be one of a large group of assets with a CCA rate of 20%. As this equipment is involved in SI's main line of business, the asset class is expected to always contain assets and to have a positive balance.
One financing alternative is a bank loan at the rate of 7% per annum, which is consistent with current debt. Another alternative is to lease the equipment for $200,000 per year for five years with the payments at the start of each year. The corporate tax rate is 40%. If SI leases the asset, it won't be responsible for maintenance and insurance costs of $40,000 per annum due at year end, but it will have the same basic operating costs as if it had purchased the equipment. If the firm purchases the equipment, it will be entitled to an investment tax credit of 5% of the purchase price.
Based on this information, which of the following statements correctly gives the net value to lease (NVL) and SI's decision on how to finance the acquisition?
a) The NVL is -$89,789, and SI should purchase the equipment.
b) The NVL is -$89,789, and SI should lease the equipment.
c) The NVL is -$113,114, and SI should lease the equipment.
d) The NVL is -$113,114, and SI should purchase the equipment.
Q3. Which of the following statements best describes the meaning of the ex-dividend date for common shares?
a) It is the date that determines whether a buyer of a new share is entitled to the dividend.
b) It is the date on which the amount of dividends per share is announced.
c) It is the date of approval of a dividend by the company's Board of Directors.
d) It is the date the dividend is paid.
Q4. Historically, Brisbane Inc. has purchased a subcomponent used in its primary product from a local firm. Brisbane is now considering producing the subcomponent itself. For Brisbane to be able to produce the subcomponent, it needs to purchase a new machine at a cost of $750,000 and will have to invest $100,000 in additional net working capital. Currently, the total cost of the subcomponent is $800,000 per year. If Brisbane manufactures the subcomponent, it estimates that its cost will be $500,000. For its capital-budgeting analysis, Brisbane will use a seven-year planning horizon, which coincides with the useful life of the new machine. Brisbane's marginal tax rate is 35%, and its cost of capital is 14%.
Ignoring CCA and salvage, what are the payback period (PBP) and internal rate of return (IRR) for the proposed project?
a) PBP = 2.833 years; IRR = 13.468%
b) PBP = 3.846 years; IRR = 17.683%
c) PBP = 4.359 years; IRR = 13.468%
d) PBP = 4.359 years; IRR = 17.683%
Q5. A seven-year project will provide cash inflows of $150,000 every year for seven years. The project involves purchasing a piece of equipment worth $925,000. The equipment will be worth $100,000 after seven years, and it will be sold at the end of the project. The company's rate of return is 8%, its tax rate is 30% and the CCA rate for the equipment is 30%.
Which of the following options correctly states the company's decision of whether or not to undertake the project and the project's NPV?
a) Reject; NPV of -$378,331
b) Reject; NPV of -$122,837
c) Reject; NPV of -$109,017
d) Accept; NPV of $111,450
Intermediate Financial Reporting Quiz
Q1. On January 1, 20X5, Zachary GS Corp.'s (ZGS) capital structure included 400,000 common shares outstanding. On May 1, 20X5, ZGS issued (sold) an additional 70,000 common shares. A two-for-one stock split was distributed on October 1, 20X5.
Throughout 20X5, ZGS also had $1,000,000 of 3.5% cumulative preference shares outstanding. These shares were originally issued in 20X1. $300,000 of dividends were declared and paid on December 31, 20X5. Dividends were last declared and paid on December 31, 20X2.
ZGS reported comprehensive income of $1,957,000 and after-tax profit of $2,000,000. ZGS's income tax rate is 30%.
What basic earnings per share (EPS) will ZGS report for 20X5?
a) $2.12
b) $2.15
c) $2.20
d) $4.40
Q2. The following information was taken from the accounting records of Della's Hair Inc. (DHI) at its December 31, 20X2, year end:
- $1,000,000 in convertible 4% bonds, maturing in eight years, with interest payable semiannually: The bonds were issued at par value in a previous year, and no bonds were converted or repurchased during the year. Each $1,000 bond can be converted into 15 common shares at any time before maturity.
- $3,000,000 Class A convertible preference shares, with a 4% cumulative dividend per share: There are 120,000 preference shares each valued at $25, and each is convertible into three common shares any time after January 1, 20X5.
- 11,000 Series A stock options outstanding throughout the year: The holder of each stock option can purchase one common share at $21 per share. The average market price for the common shares was $23 during the year.
- The weighted average number of common shares outstanding during the year was 1,000,000.
DHI reported after-tax profit of $2,400,000 and pays income tax at a rate of 25%.
What is the amount of diluted EPS that DHI should report for 20X2?
a) $1.74
b) $1.76
c) $1.77
d) $2.28
Q3. The following information was extracted from GLS Corp.'s financial records at its December 31, 20X1, year end:
- $2,000,000 in convertible 6% bonds, maturing in 10 years, with interest payable semiannually: The bonds were issued at par value in a previous year, and no bonds were converted or repurchased during the year. Each $1,000 bond can be converted into 12 common shares until December 31, 20X6, and into 16 common shares any time on or after January 1, 20X7, until maturity of the bonds.
- $1,000,000 convertible preference shares, with a 6% cumulative dividend per share: There are 40,000 preference shares each valued at $25, and each is convertible into one common share any time after January 1, 20X4.
- 50,000 stock options issued on April 1, 20X1: Each option entitles the holder to purchase one common share at $20 per share at any time between January 1, 20X4, and December 31, 20X8. The average market price for the common shares was $25 during the year.
- The weighted average number of common shares outstanding during the year was 1,000,000.
GLS reported after-tax profit of $4,000,000 and pays income tax at a rate of 40%.
What is the diluted EPS amount that should be reported for 20X1?
a) $3.76
b) $3.77
c) $3.79
d) $3.80
Q4. Marianne Wholesale Corp. (MWC) commenced operations in 20X6. MWC is a wholesaler of a large number of products to supermarket chains. To make its statements more comparable to its competitors, MWC recently adopted the first in, first out (FIFO) assumption for inventory, which is the industry norm. MWC previously used the weighted average cost flow assumption. The following information has been gathered:
|
|
20X6
|
20X7
|
|
Closing inventory - weighted average
|
$265,000
|
$335,000
|
|
Profit before tax - weighted average
|
460,000
|
535,000
|
|
Closing inventory - FIFO
|
295,000
|
345,000
|
|
Profit before tax - FIFO
|
?
|
?
|
What amount should MWC record as pre-tax profits for 20X7?
a) $515,000
b) $545,000
c) $555,000
d) $565,000
Q5. Golf Unlimited Inc. (GUI) acquired a building at a cost of $1,000,000 on January 1, 20X3. Depreciation for the building was set on a straight-line basis over 25 years with a $100,000 residual value. In early 20X8, the company determined that the building will likely last a total of 29 years (24 years remaining) but that the estimated residual value will be $0 at that time. The company's fiscal year end is December 31.
What amount will GUI report in its 20X8 financial statements as depreciation expense pertaining to the building?
a) $30,000
b) $32,800
c) $33,333
d) $34,167
Attachment:- Assignment Files.rar