The exam have 9 multiple choice answer and 1 essay question. Only have 1.5 hour to finish the exam. I need the break down of the problems. Thank in advance for your help. Here is the questions:
1. (TCO D) A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?
$17.39 $17.84 $18.29 $18.75 $19.22
2. (TCO D) If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?
7.54% 7.73% 7.93% 8.13% 8.34%
3. (TCO D) Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?
$104.27 $106.95 $109.69 $112.50 $115.38
4. (TCO E) Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
Increase the dividend payout ratio for the upcoming year. Increase the percentage of debt in the target capital structure. Increase the proposed capital budget. Reduce the amount of short-term bank debt in order to increase the current ratio. Reduce the percentage of debt in the target capital structure.
5. (TCO E) The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 12%. The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEO’s position is accepted, what is likely to happen over time?
The company will take on too many high-risk projects and reject too many low-risk projects. The company will take on too many low-risk projects and reject too many high-risk projects. Things will generally even out over time, and, therefore, the firm’s risk should remain constant over time. The company’s overall WACC should decrease over time because its stock price should be increasing. The CEO’s recommendation would maximize the firm’s intrinsic value.
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?
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. What 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. 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 (Points : 10)
9.70% 10.78% 11.98% 13.31% 14.64%
9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 4 5 ------------------------------------------------------------------------ Cash flows -$1,100 $300 $310 $320 $330 $340 (Points : 10)
2.31 years 2.56 years 2.85 years 3.16 years 3.52 years
10. (TCO H) Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes, if it decides not to open the new office. The equipment for the project would be depreciated by the straight-line method over the project’s three-year life, after which it would be worth nothing, and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project’s three-year life. What is the project’s NPV? (Hint: Cash flows are constant in years 1-3.)
WACC Opportunity cost Net equipment cost (depreciable basis) Straight-line deprec. rate for equipment Sales revenues, each year Operating costs (excl. deprec.), each year Tax rate
10.0% $100,000 $65,000 33.333% $123,000 $25,000 35%
a. $10,521 b. $11,075 c. $11,658 d. $12,271 e. $12,885
Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer.
I still working on the exam checking the answers
Finish. However why # XXXXX 5 is a and not b? what the different between one and the other.
Yes on second read and few more thoughts its should be a. Difference is one you will take on high risk and reject low risk and in another you will take low risk and reject high risk.
Thanks I just finish. Thanks again. I'm going to need your help again next week between Friday - Wed the following week. It could be either Sat or Sun. Let me know.
We can schedule our time on Thursday.
No a problem see you later. I'll sent you a reminder Tue. I am going to rate your service, by the way, as usual outstanding! Thank. Talk later
This is Paul. What will be a good day and time for you to help me with my next assignment? Friday, Saturday, or Sunday?
At what time? Is 7:30PM OK?
This is Paul. I see you today at 7:30 P.M.
This is Paul. I'm ready and thank you for your help.