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acct 40 Ques-1.A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00




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 3.0%, 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 $45 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;$1.90 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 1.45, 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 4.75%, 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 13.00%.;What is the intrinsic value of Wei's stock?;D0;2.75;D1;2.81875;D2;2.88921875;D3;3.12035625;D1;D2;D3;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?;D0;2.75;D1;2.81875;D2;2.88921875;D3;3.12035625;D4;3.36998475;D5;3.63958353;D6;3.930750212;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?;D3;0.5;D4;0.75;D5;0.9375;D6;0.99375;Dividend;D3;0.75;D4;0.9375;D5;0.99375;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 5.00% 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 1.15. 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 = $1.70, 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;5.00% 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 $25 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 38%. 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 9% 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 14.75%, 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 14.00%;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?;Debt;Equity;Total;Market Value;55;170;225;Cost;4.55%;14.00%;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;Cash Flow;0;-1100;1;325;2;325;3;325;4;325;5;325;23. Van;Auken Inc. is considering a project that has the following cash flows;Year;Cash Flow;Cummulative Cash Flow;0;-1000;-1000;1;400;-600;2;300;-300;3;700;400;4;400;800;24. Babcock Inc. is considering a project;that has the following cash flow and WACC data.;What is the project's;NPV?;Year;Cash Flow;0;-950;1;500;2;300;3;400;25.;Garvin Enterprises is considering a project that has the following;cash flow and WACC;data. What is the project's discounted payback?;Year;Cash Flow;PV Factor;PV;Cummulative Cash Flow;0;-1000;1.0000;-1000;-1000;1;500;0.9009;450.4504505;-549.54955;2;500;0.8116;405.8112166;-143.738333;3;500;0.7312;365.5956907;221.857358;26. Hindelang;Inc. is considering a project that has the following cash flow and WACC data.;What is the project's MIRR?;Year;Cash Flow;0;-900;1;300;2;320;3;340;4;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 = $500,000;Compute the profitability index of this project if Hogwarts? WACC is 12%.;Year;Cash Flow;1;750000;2;750000;3;750000;4;1250000;PV;$25,95,771.05;28. Anderson Associates is considering two;mutually exclusive projects that have the following cash;Flows;Project A;Project B;Year;Cash Flow;Cash Flow;Difference;0;-10000;-8000;-2000;1;3000;7000;-4000;2;2000;3000;-1000;3;6000;1000;5000;4;8000;1000;7000;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?;Year;System A;System B;0;-$1,00,000;-$1,00,000;1;60000;$48,000;2;-$40,000;$48,000;3;60000;-$62,000;4;-$40,000;$52,800;5;60000;$52,800;6;60000;$52,800;System B add maximum value and its NPV is;$19,930.94;30. Using the information from problem 29 on;Walker & Campsey, what is the equivalent annual annuity (EAA) for System;A?;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;c. Project X has more market risk;than Project Y.;33;34;35;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 38.0%;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 $80,000;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 $8,000, and its tax;rate is 35%. What is the equipment?s net after-tax salvage value for use in a;capital budgeting analysis?;Net Book Value = 20000*25% = 5000;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%;Dep;Rate;Dep;1;33.33%;19998;2;44.45%;26670;3;14.81%;8886;4;7.41%;4446;Year;1;2;3;Year;0;1;2;3;NPV;40. A;project's base case or most likely NPV is $50,000, and assume its probability;of occurrence is60%. Assume the best case scenario NPV is 60% 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.;Case;Probality;NPV;NPV ? Mean;Prob*(NPV ? Mean)^2;Base Case;60.00%;50000;-3000;5400000;Best Case;20.00%;80000;27000;145800000;Worst Case;20.00%;35000;-18000;64800000;Expected NPV;53000;Variation;216000000;Standard deviation;14696.93846


Paper#51884 | Written in 18-Jul-2015

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