Question 2

KSS common stock has a beta of 1.5. The market long-term expected return is 12% and the risk free rate is 2%. What is the cost of retained earnings?

	14%
	11%

	15%
	17%

Question 3

CIS common stock currently pays a dividend of $2 per share and trades for $40 per share. New shares can be issued with a $2 per share floatation cost CIS is expected to grow at 4%. What is the cost of a new stock issue?

	9.47%
	12.32%

	12.76%
	4.70%

Question 4

KSS corporation uses 30% debt, 10% preferred stock, and 60% equity to finance new capital expenditures. The after tax cost of debt is 6%, the cost of preferred stock is 9%, the cost of retained earnings is 12% and the cost of a new stock issue is 14%. What is the WACC if a new stock issue is needed?

	8.4%
	9.8%

	11.9%
	11.1%

Question 5

Consider the following information for projects K and W:

Project K: NPV = $2,500 IRR = 20%

Project W: NPV = $1,500 IRR = 15%

Assume Project K and Project W are mutually exclusive projects with a WACC = 10%. Which of the following is true?

	Only Project W should be enacted since it has the highest NPV
	Both Projects K and W should be enacted since both have a positive NPV

	Only Project K should be enacted since it has the highest NPV
	Neither Project K or W should be enacted since both have a positive NPV

Question 6

Consider the following series of cash flows:

Cash Flow: -40 20 20 10 20

Time: 0 1 2 3 4

If you are using a 10% discount rate, which of the following is true?

	Payback will be smaller than discounted payback
	Payback will be larger than discounted payback

	Payback and discounted payback will both be less than 0
	Payback and discounted payback will be the same

Question 7

A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at year 0 to mitigate the environmental problem, but it would not be required to do so. However, if the firm does not deal with the problem at year 0 they would face a lawsuit at the end of the project (year 4) at a cost of $20 million. Developing the mine (without mitigation) would cost $60 million and the expected cash inflows would be $20 million for 4 years. The weighted average cost of capital (WACC) is 12%. Below is a summary of possible outcomes:

NPV with mitigation costs at time 0 included = -$9.25 million

NPV without mitigation costs at time 0 and a lawsuit included in year 4 = -$11.96 million

Should the project be undertaken? If so, should the firm do the mitigation at time 0?

	Yes, the project should be undertaken and the mitigation expense should be conducted at time 0.
	No, the NPVs are negative for every possible scenario.

	Yes, the project should be undertaken and no mitigation should be conducted at time 0.
	No, the WACC is too low. If the WACC was higher, then yes.

Question 8

What is the NPV for the following series of cash flows is the WACC is 8%?

Cash Flow: -80 20 30 10 20 20

Time: 0 1 2 3 4 5

	$0.49
	-$2.82

	$20
	-$12

Question 9

KTS is trying to estimate the first-year operating cash flow. The financial staff has given you the following information:

Cost Savings = $12

Depreciation = $4

Interest Expense = $2

Marginal tax rate = 50%

What is the operating cash flow in year 1?

	$3.0
	$3.5

	$5.0
	$8.0

Question 10

Truman Industries is considering an expansion. The necessary equipment would be purchased for $12. The expansion would require an additional $2 investment in net operating working capital. The company spent and expensed $3 on research related to the project last year. What is the initial investment outlay for capital budgeting purposes?

	$12
	$11

	$17
	$14