1.

Complete the following table and compute the projects conventional payback period. For full credit, complete the entire table. (Note: Round the conventional payback period to two decimal places. If your answer is negative, be sure to use a minus sign in your answer.)

	Year 0	Year 1	Year 2	Year 3
Expected cash flow	-$5,000,000	$2,000,000	$4,250,000	$1,750,000
Cumulative cash flow
Conventional payback period:	years

The conventional payback period ignores the time value of money, and this concerns Cute Camels CFO. He has now asked you to compute Sigmas discounted payback period, assuming the company has a 9% cost of capital. Complete the following table and perform any necessary calculations. Round the discounted cash flow values to the nearest whole dollar, and the discounted payback period to two decimal places. For full credit, complete the entire table. (Note: If your answer is negative, be sure to use a minus sign in your answer.)

	Year 0	Year 1	Year 2	Year 3
Cash flow	-$5,000,000	$2,000,000	$4,250,000	$1,750,000
Discounted cash flow
Cumulative discounted cash flow
Discounted payback period:	years

Which version of a projects payback period should the CFO use when evaluating Project Sigma, given its theoretical superiority?

The discounted payback period

The regular payback period

One theoretical disadvantage of both payback methodscompared to the net present value methodis that they fail to consider the value of the cash flows beyond the point in time equal to the payback period.

How much value in this example does the discounted payback period method fail to recognize due to this theoretical deficiency?

$3,186,183

$1,351,321

$1,763,323

$4,928,461

2.

Suppose Black Sheep Broadcasting Company is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $400,000. The project is expected to generate the following net cash flows:

Year	Cash Flow
Year 1	$375,000
Year 2	$425,000
Year 3	$475,000
Year 4	$425,000

Black Sheep Broadcasting Companys weighted average cost of capital is 8%, and project Alpha has the same risk as the firms average project. Based on the cash flows, what is project Alphas net present value (NPV)?

$1,001,049

$1,401,049

$1,376,049

$1,201,259

Making the accept or reject decision

Black Sheep Broadcasting Companys decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha.

Which of the following statements best explains what it means when a project has an NPV of $0?

When a project has an NPV of $0, the project is earning a rate of return equal to the projects weighted average cost of capital. Its OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return.

When a project has an NPV of $0, the project is earning a rate of return less than the projects weighted average cost of capital. Its OK to accept the project, as long as the projects profit is positive.

When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable.

3.

aking flotation costs into account will reduce the cost of new common stock.

False: Flotation costs are additional costs associated with raising new common stock.

True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation costsimilar to how the after-tax cost of debt is calculated.

Alpha Moose Transporters is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places).

Sunny Day Manufacturing Company has a current stock price of $22.35 per share, and is expected to pay a per-share dividend of $1.36 at the end of the year. The companys earnings and dividends growth rate are expected to grow at the constant rate of 9.40% into the foreseeable future. If Sunny Day expects to incur flotation costs of 6.50% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be .

Alpha Moose Transporters Co.s addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 50% debt, 5% preferred, and 45% equity. Determine Alpha Moose Transporterss retained earnings breakpoint:

$1,166,666

$886,666

$1,026,666

$933,333