Question;1. A stock is expected;to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate;of 5% a year forever (g = -5%). If the;company?s expected and required rate of return is 15%, which of the following;statements is CORRECT?;a. The company?s;current stock price is $20.;b. The company?s;dividend yield 5 years from now is expected to be 10%.;c. The constant growth;model cannot be used because the growth rate is negative.;d. The company?s;expected capital gains yield is 5%.;e. The company?s stock;price next year is expected to be $9.50.;2. A share of common;stock has just paid a dividend of $2.00.;If the expected long-run growth rate for this stock is 6.0%, and if;investors' required rate of return is 10.5%, what is the stock?s intrinsic;value?;3. E. M. Roussakis;Inc.'s stock currently sells for $55 per share.;The stock?s dividend is projected to increase at a constant rate of 4%;per year. The required rate of return on;the stock, rs, is 15.50%. What is Roussakis;expected price 5 years from now?;4. Carter's preferred;stock pays a dividend of $1.40 per quarter.;If the price of the stock is $60.00, what is its nominal (not effective);annual expected rate of return?;5. Schnusenberg;Corporation just paid a dividend of $1.25 per share, and that dividend is;expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 1.15, the required;return on the market is 10.50%, and the risk-free rate is 4.00%. What is the intrinsic value for;Schnusenberg?s stock?;6. Rentz RVs Inc. (RRV);is presently enjoying relatively high growth because of a surge in the demand;for recreational vehicles. Management;expects earnings and dividends to grow at a rate of 30% for the next 4 years;after which high gas prices will probably reduce the growth rate in earnings;and dividends to zero, i.e., g = 0. The company?s last dividend, D0, was $1.25.;RRV?s beta is 1.20, the market risk premium is 5.75%, and the risk-free rate is;3.00%. What is the intrinsic value of RRV?s common stock?;7. Using the;information on Rentz RVs Inc. from problem 6, what is the dividend yield;expected for the next year?;8. The Wei Company's;last paid dividend was $2.75. The;dividend growth rate is expected to be constant at 2.50% for 2 years, after;which dividends are expected to grow at a rate of 8.00% forever. Wei?s required return (rs) is 16.00%. What is the intrinsic value of Wei's stock?;9. Using the;information on Wei Company from problem 8, what should be the price of Wei?s;stock at the end of Year 5?;10. You are an analyst;studying Beranek Technologies, which was founded 10 years ago. It has been profitable for the last 5 years;but it has needed all of its earnings to support growth and thus has never paid;a dividend. Management has indicated;that it plans to pay a $0.50 dividend 3 years from today, then to increase it;at a relatively rapid rate for 2 years with 50% dividend growth in year 4 and;25% dividend growth in year 5, and then to increase its dividend at a constant growth;rate of 6.00% per year thereafter.;Assuming a required return of 15.00%, what is your estimate of the intrinsic;value of Beranek's stock?;11. Schalheim Sisters;Inc. has always paid out all of its earnings as dividends, and hence has no;retained earnings. This same situation is expected to persist in the;future. The company uses the CAPM to;calculate its cost of equity. Its target;capital structure consists of common stock, preferred stock, and debt. Which of the following events would reduce its;WACC?;a. The market risk premium declines.;b. The flotation costs associated with;issuing new common stock increase.;c. The company?s beta increases.;d. Expected inflation increases.;e. The flotation costs associated with;issuing preferred stock increase.;12. Hettenhouse Company?s;(HC) perpetual preferred stock sells for $105.50 per share, and it pays a $9.50;annual dividend. If the company were to;sell a new preferred issue, it would incur a flotation cost of 6.00% of the price;paid by investors. HC?s marginal tax;rate is 30%. What is the company's cost;of preferred stock for use in calculating the WACC?;13. Scanlon Inc.'s CFO;hired you as a consultant to help her estimate the cost of capital. You have been provided with the following;data: the risk?free rate of return is 4.00%;the market risk premium is 6.00%, and Scanlon?s beta is 1.25. Based on the CAPM approach, what is the cost;of equity from retained earnings?;14. Assume that you are a;consultant to Broske Inc., and you have been provided with the following;data: D1 = $2.10, P0 = $45.50, and g =;7.00% (constant). What is the cost of;equity from retained earnings based on the DCF approach?;15. P. Lange Inc. hired your;consulting firm to help them estimate the cost of equity. The yield on Lange's bonds is 7.25%, and your;firm's economists believe that the cost of equity can be estimated using a risk;premium of 4.00% over a firm's own cost of debt. What is an estimate of Lange's cost of equity;from retained earnings?;16. In their most recent;fiscal year, XYZ, Inc. had net income of $18 million and total common equity of;$200 million. Also, XYZ, Inc. pays out;40% of its earnings as dividends. Using;the Retention Growth Model, what is your best estimate of XYZ?s expected growth;rate?;17. Several years ago the;Pettijohn Company sold a $1,000 par value, noncallable bond that now has 15;years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950, and the;company?s tax rate is 25%. To issue new;bonds, Pettijohn would incur 3% flotation costs. What is the component cost of debt for use in;the WACC calculation?;18. LePage Co. expects to;earn $2.50 per share during the current year, its expected dividend payout;ratio is 65%, its expected constant dividend growth rate is 6.0%, and its;common stock currently sells for $22.50 per share. New stock can be sold to the public at the;current price, but a flotation cost of 10% would be incurred. What would be the cost of equity from new;common stock?;19. You were hired as a;consultant to Quigley Company, whose target capital structure is 40% debt, 10%;preferred, and 50% common equity. The;interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost;of retained earnings is 16.25%, and the tax rate is 34%. The firm will not be issuing any new;stock. What is Quigley's WACC?;20. Roxie Epoxy?s balance;sheet shows a total of $50 million long-term debt with a coupon rate of 8.00%;and a yield to maturity of 7.00%. This;debt currently has a market value of $55 million. The balance sheet also shows that that the;company has 20 million shares of common stock, and the book value of the common;equity (common stock plus retained earnings) is $65 million. The current stock price is $8.50 per share;stockholders' required return, rs, is 16.00%, and the firm's tax rate is 35%. Based on market value weights, and assuming;the firm is currently at its target capital structure, what WACC should Roxie;use to evaluate capital budgeting projects?;21. Projects C and D are;mutually exclusive and have normal cash flows with an initial outflow followed;by a series of positive cash inflows. Project C has a higher NPV if the WACC is;less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the following statements is CORRECT?;a. Project D has a higher IRR.;b. Project D is probably larger in scale;than Project C.;c. Project C probably has a faster;payback.;d. Project C has a higher IRR.;e. The crossover rate between the two;projects is below 12%.;22. Frye Foods is considering a project;that has the following cash flow data.;What is the;project's IRR?;Year;0;1;2;3;4;5;Cash;flows;-$1,400;$325;$325;$325;$325;$325;23. Van Auken Inc. is considering a project;that has the following cash flows;Year;Cash Flow;0;-$1,000;1;400;2;300;3;500;4;400;The company?s WACC is 10%. What is the project?s ordinary payback?;24. Babcock Inc. is considering a project;that has the following cash flow and WACC data.;What is the project's NPV?;WACC;10.00%;Year;0;1;2;3;Cash;flows;-$950;$500;$300;$400;25. Garvin;Enterprises is considering a project that has the following cash flow and;WACC;data.;What is the project's discounted payback?;WACC;12.00%;Year;0;1;2;3;Cash;flows;-$1,000;$500;$500;$500;26. Hindelang Inc. is considering a project;that has the following cash flow and WACC data.;What is the project's MIRR?;WACC;11.00%;Year;0;1;2;3;4;Cash;flows;-$900;$300;$320;$340;$360;27. Hogwarts;Inc. is considering a project with the following cash flows;Initial;cash outlay = $2,500,000;After?tax;net operating cash flows for years 1 to 4 = $750,000 per year;Additional;after?tax terminal cash flow at the end of year 4 = $600,000;Compute;the profitability index of this project if Hogwarts? WACC is 12%.;28.;Anderson Associates is considering two mutually exclusive projects that;have the following cash;flows;Project A Project B;Year Cash Flow Cash Flow;0 -$10,000 -$8,000;1 5,000 7,000;2 2,000 3,000;3 6,000 1,000;4 8,000 1,000;At what cost of capital do the two projects;have the same net present value? (That is, what is the crossover rate?);29. Walker & Campsey;wants to invest in a new computer system, and management has narrowed the;choice to Systems A and B.;System A requires an up-front cost of $100,000, after which it;generates positive after-tax cash flows of $60,000 at the end of each of the;next 2 years. The system could be;replaced every 2 years, and the cash inflows and outflows would remain the;same.;System B also requires an up-front cost of $100,000, after which it;would generate positive after-tax cash flows of $48,000 at the end of each of;the next 3 years. System B can be;replaced every 3 years, but each time the system is replaced, both the cash;outflows and cash inflows would increase by 10%.;The company needs a computer system for 6 years, after which the;current owners plan to retire and liquidate the firm. The company's cost of capital is 14%. What is the NPV (on a 6-year extended basis);of the system that adds the most value?;30. Using the information;from problem 29 on Walker & Campsey, what is the equivalent annual annuity;(EAA) for System A?;Chapter 11;31. When evaluating a new project, firms should;include in the projected cash flows all of the;following;EXCEPT;a.;Changes in net operating working capital attributable;to the project.;b.;Previous;expenditures associated with a market test to determine the feasibility of;the project provided those costs have been expensed for tax purposes.;c.;The;value of a building owned by the firm that will be used for this project.;d.;A;decline in the sales of an existing product provided that decline is directly;attributable to this project.;e.;The;salvage value of assets used for the project at the end of the project?s;life.;32. Taussig Technologies is considering two;potential projects, X and Y. In;assessing the projects? risks, the company estimated the beta of each project;versus both the company?s other assets and the stock market, and it also;conducted thorough scenario and simulation analyses. This research produced the following;numbers;Project X;Project Y;Expected NPV;$350,000;$350,000;Standard deviation (sNPV);$100,000;$150,000;Project beta (vs. market);1.4;0.8;Correlation of the project cash flows with cash flows;from currently existing projects.;Cash flows are not correlated with the cash;flows from existing projects.;Cash flows are highlycorrelated with the cash;flows from existing projects.;Which;of the following statements is CORRECT?;a.;Project;X has more stand-alone risk than Project Y.;b.;Project;X has more corporate (or within-firm) risk than Project Y.;c.;Project;X has more market risk than Project Y.;d.;Project;X has the same level of corporate risk as Project Y.;e.;Project;X has less market risk than Project Y.;33. Langston Labs has an overall (composite);WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and;Langston evaluates low-risk projects with a WACC of 8%, average projects at;10%, and high-risk projects at 12%.;The company is considering the following projects;Project;Risk;Expected;Return;A;High;15%;B;Average;12;C;High;11;D;Low;9;E;Low;6;Which;set of projects would maximize shareholder wealth?;a.;A;and B.;b.;A;B, and C.;c.;A;B, and D.;d.;A;B, C, and D.;e.;A;B, C, D, and E.;34. Which of the following statements is;CORRECT?;a.;Since depreciation is a cash expense, the faster an;asset is depreciated, the lower the projected NPV from investing in the;asset.;b.;Under;current laws and regulations, corporations must use straight-line;depreciation for all assets whose lives are 5 years or longer.;c.;Corporations;must use MACRS depreciation for both stockholder reporting and tax purposes.;d.;Using;MACRS depreciation rather than straight line normally has the effect of;speeding up cash flows and thus increasing a project?s forecasted NPV.;e.;Using;MACRS depreciation rather than straight line normally has the effect of;slowing down cash flows and thus reducing a project?s forecasted NPV.;35. Which of the following does NOT;have incremental cash flow effects and thus should NOT be;considered in capital budgeting decisions?;a.;A;firm has a parcel of land that can be used for a new plant site, be sold, or;be used for agricultural purposes.;b.;A;new product will generate new sales, but some of those new sales will be from;customers who switch from one of the firm?s current products.;c.;A firm must obtain new equipment for the project, and;$1 million of costs for shipping and installing the new machinery will be;required.;d.;A;firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax;purposes, and they cannot be recovered if the new project is rejected.;e.;A;firm can produce a new product, and the existence of that product will;stimulate sales of some of the firm?s other products.;36. You work for Athens Inc., and you must;estimate the Year 1 operating cash flow for a project with the following;data. What is the Year 1 after-tax net;operating cash flow?;Sales;revenues;$15,000;Depreciation;$4,000;Cash;operating costs;$6,000;Tax;rate;35.0%;37. Fool Proof Software is considering a new;project whose data are shown below.;The equipment that will be used has a 3-year class life, and will be;depreciated by the MACRS depreciation system.;Revenues and Cash operating costs are expected to be constant over the;project's 10-year life. What is the;Year 1 after-tax net operating cash flow?;Equipment;cost (depreciable basis);$75,000;Sales;revenues, each year;$65,000;Cash;operating costs;$25,000;Tax;rate;35.0%;38. Bing;Services is now in the final year of a project.;The equipment originally cost $20,000, of which 75% has been;depreciated. Bing can sell the used;equipment today for $7,500, and its tax rate is 35%. What is the equipment?s net after-tax salvage;value for use in a capital budgeting analysis?;39. Thomson Media is considering investing in;some new equipment whose data are shown below. The equipment has a 3-year class life and will;be depreciated by the MACRS depreciation system, and it will have a positive;pre-tax salvage value at the end of Year 3, when the project will be closed;down. Also, some new working capital will;be required, but it will be recovered at the end of the project's life. Revenues and cash operating costs are;expected to be constant over the project's 3-year life. What is the project's NPV?;WACC;12.0%;Net;investment in fixed assets (depreciable basis);$60,000;Required;new working capital;$10,000;Sales;revenues, each year;$75,000;Operating;costs excl. depr'n, each year;$30,000;Expected;pretax salvage value;$7,000;Tax;rate;35.0%;40. A project's base case or;most likely NPV is $50,000, and assume its probability of occurrence is;60%. Assume the best case scenario NPV is 80% higher than the base;case and assume the worst;scenario NPV is 30% lower than the base case. Both the best case scenario and the worst;case scenario;have a 20% probability of occurrence. Find the project's coefficient of variation.
Paper#38410 | Written in 18-Jul-2015Price : $132