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7. Which one of the assertions about statement 1 and statement 2 is most likely to...

7. Which one of the assertions about statement 1 and statement 2 is most likely to be true? Statement 1: Yesterday, the amount of trading activity on the stock market involving common stock was greater than the amount of trading activity on the stock market involving preferred stock.

Statement 2: If Cherry’s Blossoms has issued preferred stock, common stock, and bonds, then the preferred stock of Cherry’s Blossoms is most likely to be the riskiest of the securities issued by the company.

A. Statement 1 is true and statement 2 is true

B. Statement 1 is false and statement 2 is true

C. Statement 1 is false and statement 2 is false

D. Statement 1 is true and statement 2 is false

New England Singers is considering buying a new, high efficiency sound system. The new system would be purchased today for $86,000. It would be depreciated straight-line to $24,000 over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be $27,000. The system is expected to reduce costs by $23,000 in year 1 and by $73,000 in year 2. If the tax rate is 50% and the cost of capital is 6.7%, what is the net present value of the new sound system project?

A. $7,377 (plus or minus $100)
B. $8,695 (plus or minus $100)
C. -$15,021 (plus or minus $100)
D. $19,588 (plus or minus $100)
E. None of the above is within $10 of the correct answer

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Homework Answers

Answer #1

1) D is correct.

Equity would have higher volume than preferred stock for any firm because the preferred stock market is very limited. Investors of preferred shares typically don't trade as much as equity shareholders do.

Equity is the riskiest of them all.

2) B is correct.

0 1 2
Investment -86,000
Salvage 27,000
Savings 23,000 73,000
Depreciation -31,000 -31,000
EBT -8,000 42,000
Tax (50%) 4,000 -21,000
Net Income -4,000 21,000
Cash Flow -86,000 27,000 79,000
NPV $8,695
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