Reference no: EM132020378

1. Your company is considering the purchase of a fleet of cars for $200,000. It can borrow at 9%. The cars will be used for four years. At the end of four years they will be worthless. You call a leasing agent and find that the cars can be leased for $55,000 per year. The corporate tax rate is 40% and the cars belong in CCA class 10 (a 30% class), what is the net advantage to leasing?

a. $15,363

b. $5,399

c. $11,742

d. $7,771

e. $6,594

2. Al's Audio has a cost of debt of 5 percent, a cost of equity of 11 percent, and a cost of preferred stock of 8 percent. The weight for debt is 0.13, the weight for preferred shares is 0.34, and the weight for common stock is 0.53. The company's tax rate is 34 percent. What is the weighted average cost of capital for Al's Audio Shop?

a. 9.15 percent

b. 6.54 percent

c. 6.14 percent

d. 9.45 percent

e. 8.98 percent

3. The market value of a firm that invests in projects providing a return less than its WACC should increase over time.

True

False

4. The pure play approach:

a. Involves examining investments outside of the firm that are similar to the project of interest.

b. Cannot be used if the firm has preferred stock outstanding.

c. Is most useful when each division makes a multitude of different products.

d. Should be used only if a firm has more than three divisions.

e. Is easier to implement than the subjective approach.

5. Employee turnover is an example of direct bankruptcy costs.

True

False

6. An income stock typically generates high capital gains

True

False