Trahan Lumber Company hired you to help estimate its cost of capital. You obtained the following data: D₁ = $1.25; P₀ = $22.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock?

	a.	8.84%
	b.	10.91%
	c.	11.78%
	d.	10.58%
	e.	11.35%

ANSWER:

35. Bonus point Chapter 14

The firm's target capital structure should do which of the following?

		a.	Maximize the earnings per share (EPS).
		b.	Minimize the cost of debt (rd).
		c.	Obtain the highest possible bond rating.
		d.	Minimize the cost of equity (rs).
		e.	Minimize the weighted average cost of capital (WACC).

ANSWER:

36. Lindley Corp. is considering a new product that would require an investment of $10.5 million now, at t = 0. If the new product is well received, then the project would produce after-tax cash flows of $5.3 million at the end of each of the next 3 years (t = 1, 2, 3), but if the market did not like the product, then the cash flows would be only $2.6 million per year. There is a 50% probability that the market will be good. The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak. The project's cost and expected annual cash flows would be the same whether the project is delayed or not. The project's WACC is 9.2%. What is the value (in thousands) of the project after considering the investment timing option? Do not round intermediate calculations.

	Prob.	0	1	2	3	NPV
Good CFs	50%	$10,500	$5,300	$5,300	$5,300
Bad CFs	50%	$10,500	$2,600	$2,600	$2,600
		Expected NPV w/o timing option

Wait one year
	Prob.	0	1	2	3	4	NPV
Good CFs	50%		$10,500	$5,300	$5,300	$5,300
Bad CFs	50%
			Expected NPV with timing option*

	a.	$1,248
	b.	$985
	c.	$1576
	d.	$1,445
	e.	$1,313

37. . Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow?

Equipment cost (depreciable basis)	$70,000
Sales revenues, each year	$34,000
Operating costs (excl. depr.)	$25,000
Tax rate	35.0%

	a.	$8,700
	b.	$6,884
	c.	$7,565
	d.	$7,716
	e.	$8,473