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FIN515 Week 6 Test - 1. (TCO D) A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and

FIN515 Week 6 Test
 
1. (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%. Which is the current stock price? (Points : 10)
$23.11 $23.70 $24.31 $24.93 $25.57
 
2. (TCO D) If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, which is the stock’s expected dividend yield for the coming year? (Points : 10)
4.42% 4.66% 4.89% 5.13%  5.39%
 
3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. Which is its effective annual (not nominal) rate of return? (Points : 10)
6.62% 6.82%  7.03% 7.25% 7.47%
 
4. (TCO E) Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm 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, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would reduce its WACC? (Points : 10)
The market risk premium declines.
The flotation costs associated with issuing new common stock increase.
The company’s beta increases.
Expected inflation increases.
The flotation costs associated with issuing preferred stock increase.
 
5. (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 (Points : 10)
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.
 
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, which is the cost of common from retained earnings? (Points : 10)
9.67% 9.97% 10.28% 10.60% 10.93%
 
7. (TCO F) Warnock Inc. is considering a project that has the following cash flow and WACC data. Which is the project's NPV? Note that a project's expected NPV can be negative, in which case it will be rejected.

WACC:  10.00%

Year                  0          1          2          3
                    ---------------------------------------------           
Cash flows     -$950     $500     $400     $300 (Points : 10)
 
$54.62 $57.49 $60.52 $63.54 $66.72
 
8. (TCO F) Data Computer Systems is considering a project that has the following cash flow data. Which 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
                    -----------------------------------------------
Cash flows     -$1,100     $450     $470     $490 (Points : 10)
9.70% 10.78% 11.98% 13.31% 14.64%
 
9. (TCO F) Fernando Designs is considering a project that has the following cash flow and WACC data. Which 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) Temple Corp. is considering a new project, which has data as shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-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 3-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 . $18,359 e. $19,325
 
Indicate your choice for your answer (a, b, c, d, e) first, and then show your work and explain your answer so as to earn partial credit in the event you selected the incorrect answer. (Points : 10)
 
TUTORIAL PREVIEW
Depreciation = 65,000 x 33.333% = 21666.65
Year 1-3 Operating net cash flow:
Sales
65,500
Less other operating expenses
-25,000
Less Depreciation
-21,667
 
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