1. Susmel Inc. is considering a project that has the following cash flow data. What is the project’s payback? Year 0 1 2 3 Cash Flows -$500 $150 $200 $300 a. 2.03 years b. 2.25 years c. 2.50 years d. 2.75 years e. 3.03 years 2. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow? Sales Revenues $13,000 Depreciation $4,000 Other operating costs $6,000 Tax rate 35.0% a. $5,950 b. $6,099 c. $6,251 d. $6,407 e. $6,568 3. Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? a. $2.20 b. $2.44 c. $2.69 d. $2.96 e. $3.25 4. If a typical 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 a. become riskier over time, but its intrinsic value will be maximized b. become less risky over time, and this will maximize its intrinsic value c. accept too many low-risk projects and too few high-risk projects d. become more risky and also have an increasing WACC. Its intrinsic value will not be maximized e. 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 5. Qualcomm Inc.’s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock’s expected price 5 years from now? a. $40.17 b. $41.20 c. $42.26 d. $43.34 e. $44.46 6. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company’s beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price? a. $14.52 b. $14.89 c. $15.26 d. $15.64 e. $16.03 ( 7. Masulis Inc. 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 4 Cash Flows -$950 $525 $485 $445 $405 a. 1.61 years b. 1.79 years c. 1.99 years d. 2.22 years e. 2.44 years 8. Bilulu Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. WACC: 8.75% Year 0 1 2 3 4 CFS -$1,100 $375 $375 $375 $375 CFL -$2,200 $725 $725 $725 $725 a. $32.12 b. $35.33 c. $38.87 d. $40.15 e. $42.16 9. Assume that Kish Inc. hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings? a. 9.29% b. 9.68% c. 10.08% d. 10.50% e. 10.92% 1 0. Several years ago the Metalusa Inc. sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the companys tax rate is 40%. What is the component cost of debt for use in the WACC calculation? a. 4.28% b. 4.46% c. 4.65% d. 4.83% e. 5.03% 11. Data Computer Systems 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 Cash Flows -$1,100 $450 $470 $490 a. 9.70% b. 10.78% c. 11.98% d. 13.31% e. 14.64% 12. Desai Industries is analyzing an average-risk project, and the following …
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