• 1. You are considering an investment in Keller Corporations stock, which is expected to pay a dividend of $2,50 a share at the end of the year (D₁ = $2,50) and has a beta of 0,8 The risk-free rate is 5,8%, and the market risk premium is 6,5%. Keller currently sells for $25,50 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?.
• 2 .Mitts Cosmetics Co.s stock price is $59,78, and it recently paid a $2,25 dividend. This dividend is expected to grow by 22,50% for the next 3 years, then grow forever at a constant rate, g; and r_s 12,50%. At what constant rate is the stock expected to grow after Year 3?.
• 3. Klose Outfitters Inc. believes that its optimal capital structure consists of 50% common equity and 50% debt, and its tax rate is 35%. Klose must raise additional capital to fund its upcoming expansion. The firm will have $3 million of retained earnings with a cost of r_s 12,50%. New common stock in an amount up to $7 million would have a cost of r_e 16%. Furthermore, Klose can raise up to $4 million of debt at an interest rate of rd 11% and an additional $5 million of debt at r_d 12,50%. The 4 CFO estimates that a proposed expansion would require an investment of $6,50 million. What is the WACC for the last dollar raised to complete the expansion?.
• 4 .Hook Industries capital structure consists solely of debt and common equity. It can issue debt at rd 12%, and its common stock currently pays a $2,50 dividend per share (D₀ = 2,50). The stocks price is currently $25,50, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 35%, and its WACC is 14,05%. What percentage of the companys capital structure consists of debt?.
• 5. An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $15 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t 1 of $17.5 million. Under Plan B, cash flows would be $2,625 million per year for 20 years. The firms WACC is 12%.

a. Construct NPV profiles for Plans A and B, identify each projects IRR, and show the approximate crossover rate.

b. Is it logical to assume that the firm would take on all available independent, averagerisk projects with returns greater than 12%? If all available projects with returns greater than 12% have been undertaken, does this mean that cash flows from past investments have an opportunity cost of only 12% because all the company can do with these cash flows is to replace money that has a cost of 12%? Does this imply that the WACC is the correct reinvestment rate assumption for a projects cash flows? Why or why not?.