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 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 company’s 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

Answer 1