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3 Project (Individual) Question 1: Answer the following questions: ..(8 Marks) 1. Explain the difference between a bid price and an asked price and also explain why the prices are different. (1x3= 3 Marks) Answer: 2. For the period 1926-2011, small-company stocks had a risk premium of 12.6 percent. What does the term risk premium mean? Is the risk premium on these stocks considered to be relatively high or relatively low as compared to other investment classes? Explain why? (3 Marks) Answer: 3. The common stock of The Garden of Eden is selling for $42 a share. The company pays a constant annual dividend and has a total return of 5.8 percent. What is the amount of the dividend? (2 Marks) Answer: Question 2. Answer the following questions: w. 10 Marks) 1. Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 12 percent. What is the dividend growth rate? (2 Marks) Answer: 2. Smith and Weston firm has 55,000 shares of common stock outstanding at a price of $31 a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a share. The firm has 8 percent, 12-year bonds outstanding with a total face value of $400,000. The bonds are currently quoted at 101.2 percent of face and pay interest semiannually. What is the capital structure weight of the firm's preferred stock if the tax rate is 35 percent? (6 Marks) 2 A ] () Answer: 3. Healthy Snacks, Inc. has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pretax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 35 percent? (2 Marks) Answer: Question 3. Answer the following questions: ml10 Marks) 1. What is the net present value of a project with the following cash flows if the discount rate is 15 percent? (4 Marks) Year Cash Flow 0 -$39.400 12.800 2 21.700 3 18.100 1 Answer: 2. What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent? (4 Marks) Time period Cash flow 0 -$17,000 1 4,500 2 8,700 11,900 3 Answer: 3. The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? (2 Marks) Answer: 3 ) 10/2014 Revision Date 25/05/2015 BANDECT-ACAF-ACAFO-FRM Project (Individual) Question 4: Answer the following questions: ..(12 Marks) 1. Identify one primary strength and one primary weakness for each of the following methods of investment analysis: m[8 Marks) Net present value 2 Marks) Internal rate of return: mb Marks) Payback Period: Average accounting return: ml2 Marks) l2 Marks) 2. What is the IRR of the following set of cash flows? (4 Marks) Year 0 1 Cash Flow -$26,300 8.400 11.300 16,500 2 3