Question

The OMEGA Corporation has been presented with an investment opportunity that will yield cash flows of $60,000 per year in Years 1 through 4, $70,000 per year in Years 5 through 9, and $80,000 in Year 10. This
investment will cost the firm $300,000 today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?
a. 5.23 years
b. 4.86 years
c. 4.00 years
d. 6.12 years

INIWANKA Inc. is considering an investment that has a positive net present value based on its 16% hurdle rate. The internal rate of return would be

A. Zero C.     More than 16%                          

B.   16%                                                              D.     Less than 16%

AURA company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm's weighted average cost of capital.
rd = 6%
Tax rate = 40%
P0 = P25
Growth = 0%
D0 = P2.00

a. 6.0%
b. 6.2%
c. 7.0%
d. 7.2%

Which class of leverage causes earnings before interest and taxes to be more sensitive to
changes in sales?
A. Credit. B. Financial. C. Operating. D. Intrinsic.

Answer 1

Solution:
1	The correct answer is option b . 4.86 years
	Year	Investment	Cash inflow	Unrecovered
				Investment
	1	($300,000)	$60,000	($240,000)
	2		$60,000	($180,000)
	3		$60,000	($120,000)
	4		$60,000	($60,000)
	5		$70,000	$0
	6		$70,000
	7		$70,000
	8		$70,000
	9		$70,000
	10		$80,000
	Payback period = Period +( Cumulative cash in flow for that period/Cash in flow for the next period)
	= 4 + ($60,000/$70,000)
	= 4.86 years
2	The correct answer is option C, more than 16%
	Hurdle rate is the minimum rate at which NPV is Zero , it means it covers all the costs
	atleast
	IRR is the rate which above its break-even, means at which NPV is positive, greater
	than Zero.
3	The correct answer is option b 6.2%
	Cost of equity = (D0 + g /P)+ g = (2 + 0% / 25)+0% = 0.08 = 8%
	Cost of debt after tax = 6% - (6% * 40%) = 3.6%
	WACC = 60% (8%) + 40%(3.6%) = 6.24%
4	The correct answer is option c Operating leverage
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