I need help with 12-17 and 19. On twelve I do not know how to calculate the rate at which they would be indifferent. I realize it is the rate that makes IRR 0, but i do not know how to do this for two different projects. For 13-17, I'm not sure if the fact that they are independent investments makes a difference than if they were mutually exclusive, the two terms seem very similar. If you could provide me with a worked through example that would be great. I just don't know the formula for 19

Summer 2016 Final Exam Dr. Tom Patrick PART A: Multiplechoice Questions, 3 points for each, up to 60 points in total. 1. By the history record for U.S. capital market, ________ had the smallest average annual return, and ________ had the greatest standard deviation (total risk) of returns. a. b. c. d. e. Large company stocks; Small company stocks. Small company stocks; Large company stocks. Large company stocks; Treasury bills. Treasury bills; Small company stocks. Governmental bonds; Corporate bonds. 2. Star Wars Group just paid a dividend of $1.50 per share on its stock. The dividends are expected to grow at a constant rate of 10% per year, indefinitely. If investors require 15% annual return on this stock, the current stock price shall be ________. 1. 2. 3. 4. 5. $30 $33 $35 $40 $43 3. Based on the previous information from Q2, seven years from now the stock price of Star Wars Group shall be ________. 1. 2. 3. 4. 5. $52.32 $58.46 $64.31 $72.50 $77.95 4. Cardassia Corp. will pay a dividend of $2.00 per share on its stock for the next year. The dividends are expected to grow at a constant rate of 15% per year, indefinitely. If investors expect and require 10% annual return on this stock, the current stock price shall be ________. a. b. c. d. e. -$44 -$40 $40 $44 None of the above. 5. One investment opportunity should be rejected if its NPV is ________ and its IRR is ________. a. b. c. d. e. Positive; Positive. Positive; Greater than the required return. Negative; Negative. Negative; Smaller than the required return. Negative; Greater than the required return. 6. The IRR and NPV rules always lead to identical decisions if: a. b. c. d. e. The project's cash flows are conventional. The projects are mutually exclusive. The projects are independent. Both (a) and (b). Both (a) and (c). 7. Darth Vader, Inc. is looking at setting up a new manufacturing plant in Death Star to produce TIE fighters. The company bought some land a decade ago for $40 billion. The land was appraised recently for $30 billion. Darth Vader wants to build the new plant on this land; the plant will cost $50 billion to build, and the site requires $3 billion worth of grading before it is suitable for construction. What should be the proper \"incremental cash flow\" amount to use as the initial investment (CF0)? a. b. c. d. e. $43 $60 $63 $83 $93 billion. billion. billion. billion. billion. Questions 812 refer to the following information. Year Project A (upgrade existing Wings) B- Project B (develop new X-Wings) 0 -$250,000 -$400,000 1 $100,000 $50,000 2 $80,000 $70,000 3 $60,000 $80,000 4 $40,000 $120,000 5 $20,000 $200,000 The above are two mutually exclusive investment projects for Rebel Alliance. The Alliance requires getting their invested amount fully paid back within 5 years. The Alliance's cost of capital (i.e., the required return on investment) is 6% annually. 8. Based on the Payback rule, what project(s) should the Alliance accept? a. b. c. d. Project A only. Project B only. Both Projects A and B. Neither Project A or B. 9. Based on the NPV rule, what project(s) should the Alliance accept? a. b. c. d. Project A only. Project B only. Both Projects A and B. Neither Project A or B. 10. Based on the IRR rule, what project(s) should the Alliance accept? a. b. c. d. Project A only. Project B only. Both Projects A and B. Neither Project A or B. 11. Based on your answers to Q810, what project(s) should the Alliance accept? a. b. c. d. Project A only. Project B only. Both Projects A and B. Neither Project A or B. 12. At what discount rate would the Alliance be indifferent between the two projects? a. b. c. d. e. 4%. 5%. 6%. 7% 8%. Questions 13-16 refer to the following information. There are two independent investment projects for the Galactic Empire. Project A (build TIE Fighters) costs the Empire $300,000 to set up, and it will provide annual cash inflows of $70,000 for 7 years. Project B (build Death Star) costs the Empire $1,000,000 to set up, and it will provide annual cash inflows of $255,000 for 6 years. The Empire's cost of capital (i.e., the required return on investment) is 10% annually, and the Empire requires the initial investments in those projects be fully paid back within 4 years, or it will be running out of money by then. 13. Based on the NPV rule, what project(s) should the Empire accept? a. Project A only. b. Project B only. c. Both Projects A and B. d. Neither Project A or B. 14. Based on the IRR rule, what project(s) should the Empire accept? a. Project A only. b. Project B only. c. Both Projects A and B. d. Neither Project A or B. 15. Based on the Payback rule, what project(s) should the Empire accept? a. Project A only. b. Project B only. c. Both Projects A and B. d. Neither Project A or B. 16. Based on your answers to Q1315, what project(s) should the Empire finally choose? a. Project A only. b. Project B only. c. Both Projects A and B. d. Neither Project A or B. 17. The capital assets pricing model (CAPM) tells us that in an efficient and fair capital market, the expected return on an asset only depends on its: a. Total risk. b. Systematic risk. c. Unsystematic risk. d. No risk. 18. The CAPM shows that the expected return for a particular asset depends on the following factors except: a. b. c. d. Market risk premium. The pure time value of money. The amount of unsystematic risk. The amount of systematic risk. 19. ObiWan's common stock has a beta of 1.4. If the riskfree rate is 3 percent and the market risk premium is 15 percent, what is ObiWan's cost of equity? a. 16.80%. b. 19.80%. c. 21.00%. d. 24.00%. 20. Yoda Co.'s most recent dividend was $1.50 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. The stock sells for $30 per share. What is Yoda's cost of equity? a. 10.00% b. 10.25%. c. 11.00%. d. 11.25%. PART B: Problemsolving Questions, up to 40 points in total. (NOTE: You must present enough solution steps and details for credits.) Problem #1 Using the information provided below, answer the questions that follow. Growth rate of dividends and common stock share price 4% Interest rate = 6% Risk free rate of return = 5% Return on the market = 12% Tax bracket = 40% Dividend on common stock (past year) = $3 Dividend on preferred stock = $4 Price per share of common stock = $30 Price per share of preferred stock = $100 Beta = 1.3 Assume that items in the balance sheet below are in the desired proportion. (The current capital structure is the target capital structure.) _________________________________________________ Assets $100,000,000 Long term debt $45,000,000 Preferred stock $10,000,000 Common stock $30,000,000 Retained earnings $15,000,000 a.) What is this firm's after tax cost of debt? b.) What is this firm's cost of preferred stock? c.) What is this firm's cost of common stock using the dividend growth model (Gordon's model)? d.) What is this firm's cost of common stock using the CAPM model? e.) What is this firm's WACC using CAPM for cost of equity? f.) What is the firm's WACC using the dividend growth model? Problem #2 You are considering an investment in artificial brain. This will cost $10,000 and will last for 3 years. Yours cost of capital is 10%. The annual cash flows are: Year Cash flow 1. $5000 2. $5000 3. $5000 Determine: 1. The NPV of this project 2. The IRR of this project 3. Payback