Question

If a company’s cost of capital is 8.5 % and by implementing a new software systems they can save 420,000.00 per year for three years and then the software will be obsolete. The initial cost is 401,231.00 this amount includes 200,000 in working capital, and their tax rate is 38%.

19. The NPV is between: A. 500,000 & 700,000 C. 750,000& 900,000 E.1,000,000 & 1,200,000 B. 350,000 & 500,000 D. 10,000 & 49,000

20. The NPV is between : A. 500,000 & 700,000 C. 750,000 & 900,000 E. 1,000,000 & 1,200,000 B. 350,000 & 500,000 D. 10,000 & 49,000

21. The company holds all the risk in Firm commitment underwriting. A. True B. False

22. The market risk premium always stays the same. A. True B. False

23. In the constant dividend growth model D1 represents A. The last dividend paid B. The growth rate of dividends C. The price plus the dividend D. The average dividend E. None of the above

Answer 1

19

	0	1	2	3
Initial Capital ($)	-401231
Net Savings= Savings (1-T)		260400	260400	260400
Working Capital Recovered ($)				200,000
Cost of Capital	8.50%	8.50%	8.50%	8.50%
Net Cash Flows ($)	-401231	240000	221198.2	360450.9
				420418

NPV is between ($350,000 & $500,000) as the net cash flow is $420418. Option B is correct.

20. NPV is between ($350,000 & $500,000) as the net cash flow is $420418. Option B is correct.

21. In firm commitment underwriting, the investment banking company holds the total risk of buying and selling all the shares of the company. The statement is “True”

22. The market risk premium is formulated by {Beta* (Market Risk – Risk-Free)}, now if the beta and the market risks are higher and or lower then it will change the overall market premium of the stock. The statement is False.

23. In the constant dividend growth model, D1 represents the expected annual dividends of the firm. So option (E) is correct “None of the above”.