8) 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?

9.29%

9.68%

10.08%

10.50%

10.92%

14) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

A project's regular IRR is found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting this TV at the WACC.

A project's regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR.

If a project's IRR is greater than the WACC, then its NPV must be negative.

To find a project's IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project's costs.

To find a project's IRR, we must find a discount rate that is equal to the WACC. 5 points

15) Which of the following statements is CORRECT?

One defect of the IRR method is that it does not take account of cash flows over a project's full life.

One defect of the IRR method is that it does not take account of the time value of money.

One defect of the IRR method is that it does not take account of the cost of capital.

One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid. 5 points

16) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.

One drawback of the regular payback for evaluating projects is that this method does not properly account for the time value of money.

If a project's payback is positive, then the project should be rejected because it must have a negative NPV.

The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time.