Question

Q4 Your friend wants to borrow some money from you but he can only afford to pay a monthly installment of $250 at the end of each of the next 36 months. If the interest rate is 12% APR (i.E. compounded monthly), what is the most you can lend him (to the nearest $100) if the loan is to fully repaid at the end of month 36.

Select one:

a. $6,500

b. $7,500

c. $8,000

d. $9,000

e. None of the above

Q5 Your firm is financed using 20% debt, 30% preferred shares and 50% common shares, with the weights determined on a market value basis. The expected returns on each are 6.32% for debt on an after-tax basis, 7.55% for preferred shares and 12.21% for common shares. What is your firm’s weighted average cost of capital?

Select one:

a. 7.65%

b. 8.05%

c. 9.63%

d. 11.22%

e. None of the above

Q6 Why is it inappropriate to use IRR (internal rate of return) to assess the situation described in the previous question?

Select one:

a. The statement is false – it is appropriate to use IRR.

b. Without further information it is not possible to determine whether it is appropriate or inappropriate.

c. It is inappropriate to use IRR in capital budgeting situations where there is more than one reversal of cash flow.

d. It is inappropriate because the most useful way to assess a capital budgeting situation is to use the payback period.

Answer 1

Based on the given data, pls find below workings and answer:

Q4) Answer b $ 7500

Q5) Answer c 9.63%

Q4) Answer b Without further information it is not possible to determine whether it is appropriate or inappropriate.

There is no sufficient information about Cash flows in Q5, for us to establish whether usage of IRR is appropriate or not;