Chapter 6 Question 15 Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 27% per year during the next three years, 17% over the following year, and then 7% per year indefinitely. The required return on this stock is 12%, and the stock currently sells for $65 per share. What is the projected dividend for the coming year? Question 25 Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1,100,000. Without new projects, both firms will continue to generate earnings of $1,100,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 12% rate of return (ROI). (a) What is the current PE ratio for each company? (b) Pacific Energy Company has a new project that will generate additional earnings of $220,000 each year in perpetuity. Calculate the new PE ratio of the company. (c) U.S. Bluechips has a new project that will increase earnings by $440,000 in perpetuity. Calculate the new PE ratio for the firm. Chapter 7 Question 7 Pluto Planet, Inc., has a project with the following cash flows. YEAR CASH FLOWS ($) 0 -10,500 1 6,300 2 4,900 3 2,400 The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 9%, should the company accept the project? Question 10 Suppose the following two independent investment opportunities are available to Scott, Inc. The appropriate discount rate is 10%. YEAR PROJECT ALPHA PROJECT BETA 0 -1,200 -2,600 1 500 900 2 900 2,400 3 800 1,300 (a)Compute the profitability indexes for each of the two projects. (b) Which project(s) should the company accept based on the profitability index rule? Question 16 Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can either market the game as a traditional board game or as an interactive CD-ROM, but not both. Consider the following cash flows of the two mutually exclusive projects for Mario Brothers. Assume the discount rate for Mario Brothers is 10%. YEAR BOARD GAME CD-ROM 0 -$320,000 -$550,000 1 $240,000 $310,000 2 $130,000 $280,000 3 $75,000 $195,000 (a) Based on the payback period rule, which project should be chosen? (b) Based on the NPV, which project should be chosen? (c) Based on the IRR, which project should be chosen? (d) Based on the incremental IRR, which project should be chosen?
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