Please answer the following questions and show work. (Stocks, Cost of Capita & C
ID: 2726461 • Letter: P
Question
Please answer the following questions and show work. (Stocks, Cost of Capita & Capital Budgeting)
1. If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected capital gains yield for the coming year?
a. 5.2%
b. 5.4%
c. 5.6%
d. 6.0%
2. The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price?
a. $15.00
b. $20.00
c. $25.00
d. $30.00
3. McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year (D1 = $1.00). The stock sells for $20
per share and its required rate of return is 11 percent. The dividend is expected to grow at a constant rate, g, forever. What is
the growth rate, g, for this stock?
a. 5%
b. 6%
c. 7%
d. 8%
4. The last dividend paid by Klein Company was $1.00. Klein’s growth rate is expected to be
a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10
percent forever. Klein’s required rate of return on equity (ks) is 12 percent. What is the
current price of Klein’s common stock?
a. $21.00
b. $33.33
c. $42.25
d. $50.16
5. You must estimate the intrinsic value of Gallovits Technologies’ stock. Gallovits’s end-of-year free cash flow (FCF) is
expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter. The company’s WACC is
11%. Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock
outstanding. What is Gallovits' estimated intrinsic value per share of common stock?
a. $22.67
b. $24.00
c. $25.33
d. $26.67
6. Dick Boe Enterprises, an all-equity firm, has a corporate beta coefficient of 1.5. The financial manager is evaluating a project with an expected return of 21 percent, before any risk adjustment. The risk-free rate is 10 percent, and the required rate of return on the market is 16 percent. The project being evaluated is riskier than Boe’s average project, in terms of both beta risk and total risk. Which of the following statements is most correct?
a. The project should be accepted since its expected return (before risk adjustment) is greater than its required return.
b. The project should be rejected since its expected return (before risk adjustment) is less than its required return.
c. The accept/reject decision depends on the risk-adjustment policy of the firm. If the firm’s policy were to reduce a riskier-than-average project’s expected return by 1 percentage point, then the project should be accepted. *
d. Riskier-than-average projects should have their expected returns increased to reflect their added riskiness. Clearly, this would make the project acceptable regardless of the amount of the adjustment.
7. You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and
45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings
is 12.75%. The firm will not be issuing any new stock. What is its WACC?
a. 8.98%
b. 9.26%
c. 9.54%
d. 9.83%
8. Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds
have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s
common stock currently trades at $40.5 per share. The year-end dividend (D1) is expected to be $2.50 per share, and the dividend
is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common
stock to help fund this year’s projects. The company’s tax rate is 40 percent. What is the company’s weighted average cost of
capital, WACC?
a. 10.73%
b. 10.30%
c. 11.31%
d. 7.48%
9. Hamilton Company’s 8 percent coupon rate, quarterly payment, $1,000 par value bond, which matures in 20 years, currently
sells at a price of $686.86. The company’s tax rate is 40 percent. What is the firm’s component cost of debt for purposes of
calculating the WACC?
a. 3.05%
b. 7.32%
c. 7.36%
d. 12.20%
10. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in
Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000
today, and the firm’s cost of capital is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is
the payback period for this investment?
a. 5.23 years
b. 4.86 years
c. 4.00 years
d. 6.12 years
11. Coughlin Motors is considering a project with the following expected cash flows:
Project
Year Cash Flow
0 -$700 million
1 200 million
2 370 million
3 225 million
4 700 million
The project’s WACC is 10 percent. What is the project’s discounted payback?
a. 3.15 years
b. 4.09 years
c. 1.62 years
d. 3.09 years
12. Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash
flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the
higher IRR?
k = 10%
Project S: 0 1 2 3
| | | |
-1,000 500 500 500
k = 10%
Project L: 0 1 2 3 4 5
| | | | | |
-2,000 668.76 668.76 668.76 668.76 668.76
a. $243.43
b. $291.70
c. $332.50
d. $481.15
k = 10%
Explanation / Answer
2)
Required return (CAPM) = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 3%+1.2×5%
= 9%
Stock price, P0 = D1÷(r-g)
D1 is next expected dividend
r is required return
g is growth rate
= $1/(9%-5%)
= $25