Question

1.A firm is buying a new machine that has the following cash-flows during its expected life of 4 years: Purchase Price = $250,000, Terminal Value = $100,000, and yearly cash flows of $60,000. The firm has a contract with a buyer who purchases and pays the product that the machine makes at the beginning of each year. What is the expected yield of the machine? a. 28% b. 16% c. 14% d. 11.3% e. -1.61

2.A firm wants to buy a machine that is expected to yield 12%. It plans to finance it with 50% Debt and the rest Equity, so there is no preferred stock. The cost of Debt is 7% and the tax rate is 25%. What is the expected return for the shareholders?

a.   2.63%

b.   12%

c.   17%

d.   18.75%

e.   19.5%

3.Which of the following statements is CORRECT?

a.   Financial Management decisions have to be made taking into account what is available on the Financial Markets.

b.   Only firms in the mature stage have access to the capital market.

c.   If an investor sells shares of stock through a broker, then it would be a primary market transaction.

d.   Capital markets deal only with common stocks and other equity securities.

e.   A six-month bank loan is considered to be a capital market instrument.

Answer 1

1:b 16%

2: d: 18.75%

3: a

Financial management decisions depend upon information available in financial markets.

B- All firms can raise money from capital market. Early companies have access to private capital markets.

C: This is a secondary transaction

D: Capital market instruments include stocks and bonds, treasury bills, fixed deposits, and debentures also

E: Capital market excludes normal bank lending

WORKINGS