Question

1. Which of the following items is not a component when we calculate the WACC?
   1. Common stock price
   2. Cost of preferred stocks
   3. Cost of issuing common stocks
   4. Cost of retained earnings
   5. Net capital spending

2. Assume that you were hired as a financial consultant for SABIC. You have been provided with the following information: D₁ = $2.5; P₀ = $33.50; and g = 6% (constant). Based on the DCF approach, what is the cost of equity for SABIC?
   1. 10.60%
   2. 12.67%
   3. 11.33%
   4. 9.54%
   5. 13.46%

3. Al kharj Mall estimates that its WACC = 12.5% for a new expansion. The Mall is considering the following capital budgeting projects:

Project    Size   Rate of Return

       A           $1M              12%

       B           $1M              11.5%

       C           $1M              11.2%

       D           $1M              11%

       E           $1M              10.7%

       F           $1M              10.3%

       G           $1M              10.2%

Which set of projects should be accepted:

1. Projects A and B only.
2. Projects A, B, and C only.
3. Projects A, B, C, and D only.
4. Projects F and G only.
5. Accept all projects
6. Reject all projects.

4. Consider the following two mutually exclusive projects. If my WACC =10%, then I should:

Project	Year	0	1	2	3	4
A	Cash flows	-$100	$70	$70	$70	$70
B	Cash flows	-$100	$80	$70	$60	$50

1. Accept project A since its NPV = $109.81 is higher than project B’s NPV = $121.89
2. Accept project A since its NPV = $121.89 is lower than project B’s NPV = $109.81
3. Project A’s NPV = - $109.81. Thus, I shall reject project A and accept project B
4. Project B’s NPV = - $121.89. Thus, I shall reject project B and accept project A
5. We should reject both projects since they produce negative NPV values.

Answer 1

QUESTION1.

E. NET CAPITAL SPENDING

The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is Proportionately weighted. All sources of capital, including common stock,preferred stock, bonds, and any other long-term debt, are included .

QUESTION.2

E-13.46%

D1 = 2.50

PRICE PO = 33.50

GORWTH G =6%

PRICE PO =DIVIDEND/(COST OF CAPITAL-GROWTH%)

COST OF EQUITY

33.50=2.50(COST OF CAPTAL-.06)

KE=4.51/33.50*100 =13.46%

QUESTION.3

E.ACCEPT ALL THE PROJECTS

BECAUSE IT EXPECTED WACC =12.50%, ALL THE PROJECT ARE BELOW THIS CUTOFF RATE

QUESTION.4 AMOUNT IN $

B.ACCEPT PROJECT A SINCE ITS NPV IS =121.89 AS PROJCET B SHOWN

A LOWER NPV 109.81

WORKINGS

WACC IS 10%

0.909

0.826

0.751

0.683

3.170

PROJECT A

INITIAL CASH OUTFLOW 100

PROJECT A.-PV OF CASH FLOW ( CASH FLOW ARE EQUAL) - 70*3.170 221.9

NPV - ( 221.90-100) 121.9

PROJECT B

PROJECT A.INITIAL CASH OUTFLOW 100

CASH INFLOW

PV FACTOR * CASH INFLOW

80 72.73

70 57.85

60 45.08

50 34.15

PROJECT B -PV OF CASH FLOW 209.81

NPV - ( 209.81-100) 109.81