2. (TCO D) If D = $2.25, g (which is constant) = 3.5%, and P = $50, what is the stock’s expected dividend yield for the coming year? (Points: 10)
3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return? (Points: 10)
4. (TCO D) You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?
a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
e. 10.12% (Calculation: WACC
Weights Costs
Debt 40% 6.00%
Preferred 10% 7.50%
Common 50% 13.25
5. (TCO D) Lanser Inc. hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = $0.80; P0 = $22.50; and g = 5.00% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?
a. 7.34%
b. 7.72%
c. 8.13%
d. 8.56%
e. 8.98%
Component cost of retained earnings: DCF, D1
D1 $0.80
P0 $22.50
G 5.00%
rs = D1/P0 + g 8.56%
6. (TCO D) 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:
rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from retained earnings? (Points: 10)
a. 9.67%
b. 9.97%
c. 10.28%
d. 10.60%
e. 10.93%
7. (TCO F) Cornell Enterprises 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. ANSWERED Below :
(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.
Year 0 1 2 3 4 5
-------------------------------------------------------------------------------------
Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points: 10)
2.08%
2.31%
2.57%
2.82%
3.10%
9. (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 (Points: 10)
1.88 years
2.09 years
2.29 years
2.52 years
2.78 years
10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's three-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in years 1-3.)
WACC
Pre-tax cash flow reduction for other products (cannibalization)
Investment cost (depreciable basis)
Straight-line deprec. rate
Sales revenues, each year for three years
Annual operating costs (excl. deprec.)
Tax rate 10.0%
$5,000
$80,000
33.333%
$67,500
$25,000
35.0%
a. $3,636
b. $3,828
c. $4,019
d. $4,220
e. $4,431
