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7. Garrett Designs Inc. has the following data: next period dividend D1 = $1.75; current stock price Po = $42.50; dividend growth rate (assumed to
7. Garrett Designs Inc. has the following data: next period dividend D1 = $1.75; current stock price Po = $42.50; dividend growth rate (assumed to be constant) g = 7.00%, and flotation cost F= 5.00%. What is the cost of equity raised by selling new common stock? a. 10.77% b. 11.33% c. 11.90% d. 12.50% e. 13.12% 8. Johnson Enterprises is a food distribution service company that has a corporate beta = 0.65 and an WACC = 8.5%. It is considering the acquisition of a web-based restaurant rating business that has a corporate beta = 1.20 and a higher debt ratio When evaluating the acquisition, Johnson should use a: a. WACC that is the same as Johnson's b. WACC that is lower than Johnson's after adjusting for the higher amount of target's debt c. WACC that is higher than Johnson's after adjusting for the higher risk of target's equity 3 d. WACC that is average of Johnson's and target's WACCs e. WACC that cannot be determined given insufficient data 9. Consider projects S and L. Both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same cost of capital, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT? (Hint: consider NPV profiles with crossover cash flows) a. If Project S has a positive NPV, Project L must also have a positive NPV. b. If the cost of capital falls, each proiect's IRR will increase. c. If the cost of capital increases, each project's IRR will decrease. d. If Projects S and L have the same NPV at the current cost of capital, 10%, then Project L, the one with the lower IRR, would have a higher NPV if the cost of capital used to evaluate the projects declined. e. Project S must have a higher NPV than Project L. 10. The NPV and the IRR methods sometimes could result in conflicting ranks between projects. These conflicts will arise when evaluation is being made on: a. Independent projects only b. Mutually exclusive projects only c. Both independent and mutually exclusive projects d. No projects will ever encounter such conflicts
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