Question

Question 31

Your company is considering the purchase of a fleet of cars for $200,000. It can borrow at 10%. 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?

Select one:

a. $6,594

b. $7,771

c. $5,399

d. $14,011

e. $10,075

Question 32

ABC Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 7%. The firm's tax rate is 34%. The CCA rate is 20% (Class 8).What is the present value of the depreciation tax shield?

Select one:

a. $243,885

b. $26,876

c. $251,193

d. $236,959

e. $277,177

Question 33

A project costs $450 and has cash flows of $110 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

Select one:

a. 4.60 years

b. 5.33 years

c. 6.00 years

d. The project never pays back

e. 5.67 years

Question 34

The purchase and sale of securities at original issuance occurs in the:

Select one:

a. Dealer market.

b. Primary market.

c. Secondary market.

d. Auction market.

e. Liquidation market.

Question 35

Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest annually. The bonds are currently quoted at 110 percent of face value. What is Ernst's pre-tax cost of debt?

Select one:

a. 4.40 percent

b. 3.33 percent

c. 3.78 percent

d. 4.53 percent

e. 3.47 percent

Answer 1

Question 33:

A project costs $450 and has cash flows of $110 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

The cumulative cash flow table is as shown below:

Year	Cash flows	Cumulative cash flows
0	-450	-450
1	110	-340
2	110	-230
3	110	-120
4	75	-45
5	75	30
6	75	105
7	75	180
8	75	255

Payback period = Last year of negative cumulative cash flow + Absolute value of the cumulative cash flow/ Cash flow next year

Payback period = 4 + 45/75 = 4+0.6 = 4.6 Years (Option A)

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