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A project will generate a $1 million net cash flow annually in perpetuity

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1. A project will generate a $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the break-even WACC?
   
   
   A.
   13.33%
   
   B.
   12.08%
   
   C.
   14.29%
   
   D.
   16.67%
2. Which one of the following changes offers the greatest chance of changing a project's NPV from negative to positive?
   
   
   A.
   Substituting preferred stock for debt
   
   B.
   Selling the debt at less than par value
   
   C.
   Reducing the risk level of the project
   
   D.
   Decreasing the marginal tax rate
3. What decision should be made on a project of above-average risk if the project's IRR exceeds the WACC?
   
   
   A.
   Accept the project; NPV is positive
   
   B.
   Reject the project; NPV is negative
   
   C.
   Decide after discounting at the IRR
   
   D.
   Decide after discounting at an appropriate rate
4. If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project with $2 million annual cash flows before tax and interest, $3 million in debt with a 10% coupon, and a 35% tax rate?
   
   
   A.
   $5.53 million
   
   B.
   $5.87 million
   
   C.
   $8.5 million
   
   D.
   $9.03 million
5. For purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then:
   
   
   A.
   the book value of equity should be used.
   
   B.
   the book value of equity less retained earnings should be used.
   
   C.
   the market value of equity should be used.
   
   D.
   the market value of equity less retained earnings should be used.
6. How much cash flow before tax and interest is necessary to support a project that requires $4 million annually for equity investors and $2 million annually in interest payments if the firm's tax rate is 35%?
   
   
   A.
   $7.40 million
   
   B.
   $8.10 million
   
   C.
   $8.15 million
   
   D.
   $8.85 million
7. What percentage of value should be allocated to equity in WACC computations for a firm with $50 million in debt selling at 85% of par, $50 million in book value of equity, and $65 million in market value of equity?
   
   
   A.
   50.00%
   
   B.
   54.18%
   
   C.
   56.55%
   
   D.
   60.47%
8. According to CAPM estimates, what is the cost of equity for a firm with a beta of 1.5 when the risk-free interest rate is 6% and the expected return on the market portfolio is 15%?
   
   
   A.
   19.5%
   
   B.
   21.0%
   
   C.
   22.5%
   
   D.
   24.0%
9. What return on equity do investors seem to expect for a firm with a $55 share price, an expected dividend of $4.60, a beta of 0.9, and a constant growth rate of 3.5%?
   
   
   A.
   9.87%
   
   B.
   12.48%
   
   C.
   13.95%
   
   D.
   11.86%
10. Changing the capital structure by adding debt will not:
    
    
    A.
    increase the return that shareholders require.
    
    B.
    increase default risk.
    
    C.
    decrease debtholder risk.
    
    D.
    increase the cost of debt.