TCO D) A stock just paid a dividend of D0 = $1.50. The
required rate of return is rs = 10.1%, and the constant growth rate is g =
4.0%. What is the current stock price?
$23.11
$23.70
$24.31
$24.93
$25.57
Question 2. Question
:
(TCO D) If D1 = $1.50, g (which is constant) = 6.5%, and P0
= $56, what is the stock’s expected capital gains yield for the coming year?
6.50%
6.83%
7.17%
7.52%
7.90%
Comments:
Question 3. Question
:
(TCO D) Molen Inc. has an outstanding issue of perpetual
preferred stock with an annual dividend of $7.50 per share. If the required
return on this preferred stock is 6.5%, at what price should the preferred
stock sell?
$104.27
$106.95
$109.69
$112.50
CORRECT $115.38
Question 4. Question
:
(TCO E) Bankston Corporation forecasts that if all of its
existing financial policies are followed, its proposed capital budget would be
so large that it would have to issue new common stock. Since new stock has a
higher cost than retained earnings, Bankston would like to avoid issuing new
stock. Which of the following actions would REDUCE its need to issue new common
stock?
Increase the dividend payout ratio for the
upcoming year.
Increase the percentage of debt in the target
capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in
order to increase the current ratio.
Reduce the percentage of debt in the target
capital structure.
Question 5. Question
:
(TCO E) If a typical U.S. company correctly estimates its
WACC at a given point in time and then uses that same cost of capital to
evaluate all projects for the next 10 years, then the firm will most likely
become riskier over time, but its intrinsic
value will be maximized.
become less risky over time, and this will
maximize its intrinsic value.
accept too many low-risk projects and too few
high-risk projects.
become more risky and also have an increasing
WACC. Its intrinsic value will not be maximized.
continue as before, because there is no reason
to expect its risk position or value to change over time as a result of its use
of a single cost of capital.
Question 6. Question
:
(TCO D) Assume that you are a consultant to Broske Inc., and
you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g =
8.00% (constant). What is the cost of common from retained earnings based on
the DCF approach?
9.42%
9.91%
10.44%
10.96%
11.51%
Question 7. Question
:
(TCO F) Barry Company is considering a project that has the
following cash flow and WACC data. What is the project’s NPV? Note that a
project’s expected NPV can be negative, in which case it will be rejected.
WACC: 12.00%
Year
0 1 2 3 4 5
———————————————————————–
Cash flows
-$1,100 $400 $390
$380 $370 $360
:
$250.15
$277.94
$305.73
$336.31
$369.94
Question 8. Question
:
(TCO F) Maxwell Feed & Seed is considering a project
that has the following cash flow data. What is the project’s IRR? Note that a
project’s IRR can be less than the WACC (and even negative), in which case it
will be rejected.
Question 9. Question
:
(TCO F) Fernando Designs is considering a project that has
the following cash flow and WACC data. What is the project’s discounted
payback?
WACC: 10.00%
Year 0 1 2 3
———————————————
Cash flows
-$900 $500 $500
$500
:
1.88 years
2.09 years
2.29 years
2.52 years
2.78 years
Payback = 2.09 years
– – – 2.09
Question 10. Question
:
(TCO H) Temple Corp. is considering a new project whose data
are shown below. The equipment that would be used has a three-year tax life,
would be depreciated by the straight-line method over its three-year life, and
would have a zero salvage value. No new working capital would be required.
Revenues and other operating costs are expected to be constant over the
project’s three-year life. What is the project’s NPV?
Risk-adjusted WACC
Net investment cost (depreciable basis)
Straight-line deprec. rate
Sales revenues, each year
Operating costs (excl. deprec.), each year
Tax rate 10.0%
$65,000
33.333%
$65,500
$25,000
35.0%
a. $15,740
b. $16,569
c. $17,441
d. $18,359
e. $19,325
Indicate your choice for your answer – a,b,c,d,e first and
then show your work/explain your answer so as to earn partial credit in the
event you selected the incorrect answer.
