Question
QUESTION 8 A company will issue new common stock to finance an expansion. The existing common stock just paid a $1.25 dividend, and dividends are
QUESTION 8
A company will issue new common stock to finance an expansion. The existing common stock just paid a $1.25 dividend, and dividends are expected to grow at a constant rate 9% indefinitely. The stock sells for $45, and flotation expenses of 6% of the selling price will be incurred on new shares. The beta of this company is 1.34. What is the cost of new common stock for this company?
10.16% | ||
11.19% | ||
9.13% | ||
12.22% | ||
8.10% |
QUESTION 10
You are considering a new project that will cost $750,000. The project is expected to generate positive cash flows over the next four years in the amounts of $300,000 in year one, $325,000 in year two, $250,000 in year three, and $280,000 in year four. Your required rate of return is 8%. What is the discounted payback period of the project?
2.74 years | ||
2.08 years | ||
2.98 years | ||
2.31 years | ||
2.54 years |
QUESTION 11
Suppose you are given the following two projects A and B with the cash flows below, if the cost of capital is 10%, what is the Profitability Index (PI) of projects A and B?
Year | Project A | Project B |
0 | -5000 | -6000 |
1 | 1500 | 1500 |
2 | 2000 | 2500 |
3 | 2500 | 2500 |
4 | 3500 | 4000 |
1.457;1.340 | ||
1.457;1.492 | ||
1.622;1.409 | ||
1.532;1.528 | ||
1.639;1.340 |
QUESTION 12
A company is evaluating two independent projects for capital investment purposes. If the company has only $85 million to invest, and its required return is 10 percent by how much the companys value will increase?
All values are in millions.
| Project 1 | Project 2 |
0 | -50 | -50 |
1 | 30 | 0 |
2 | 25 | 0 |
3 | 20 | 0 |
4 | 20 | 150 |
60.77 million
52.45 million
79.07 million
26.62 million
45.33 million
QUESTION 13
Your company is evaluation 4 independent projects and is subject to capital rationing, detailed as follows:
Project Initial Outlay IRR NPV
1 2 million 18% 2,500,000
2 1 million 15% 950,000
3 1 million 10% 600,000
4 3 million 9% 2,000,000
If you must select projects subject to a budget constraint of 4 million dollars, which set of projects should be accepted so as to maximize firm value?
1 and 2
1 only
2,3 and 4
1 and 4
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