Question 171 pts

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) r_d = yield on the firms bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) r_RF = 5.00%, RP_M = 6.00%, and b = 1.05. (3) D₁ = $1.20, P₀ = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

Group of answer choices

0.49%

0.38%

0.43%

0.37%

0.48%

Flag question: Question 18

Question 181 pts

Which of the following statements is CORRECT?

Group of answer choices

When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability.

The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.

To find the MIRR, we discount the TV at the IRR.

A projects NPV profile must intersect the X-axis at the projects WACC.

The discounted payback method eliminates all of the problems associated with the payback method.

Flag question: Question 19

Question 191 pts

You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the projects risk-adjusted WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: $110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the appropriate WACC for this project is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527.01%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

Group of answer choices

You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firms value will decline if it is accepted.

You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.

You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firms value will decline if the project is accepted.

You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firms value will increase if the project is accepted.

You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.

Flag question: Question 20

Question 201 pts

Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negative, in both cases it will be rejected.

Year	0	1	2	3
Cash flows	-$1,375	$425	$425	$425

Group of answer choices

3.61%

2.84%

3.20%

3.83%

3.68%