1. Bay Inc. just paid its first annual dividend of $0.60 a share. The firm plans to increase the dividend by 3 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $12 a share?

   		7.94 percent
   		9.16 percent
   		6.11 percent
   		8.15 percent

QUESTION 19

1. Eucalyptus Company is financed by $4 million in debt, $1 million in preferred stocks, and $5 million in common stocks. The pre-tax cost of debt is 6%, the cost of preferred stock is 8%, and the cost of equity is 14%. Calculate the weighted average cost of capital. Assume 20% tax rate.

   		9.72%
   		6.29%
   		7.26%
   		8.60%

1. Gutweed Co. is considering a project with an initial cost of $4 million. The project will produce cash inflows of $1.5 million a year for five years. The firm has a weighted average cost of capital of 9%. Assume that the project has an average risk level as the whole firm. What is the net present value of the project?

   		$1.83 million
   		$3.22 million
   		$0.92 million
   		$2.41 million

Given the following data for a stock: beta = 1.2; risk-free rate = 3%; market rate of return = 13%; and expected rate of return on the stock = 17%. Then the stock is:

1. A stock records the following returns over the last 6 months.

1. What are the arithmetic returns for the stocks?
2. What are the geometric returns for the stocks?
3. What are the variances for the stocks?
4. What are the standard deviations for the stocks?
5. Compute the coefficient of variation of stocks.
6. Which stock would you choose? Why?

Beta is defined as:

the ratio of the variance of market returns to the covariance of returns on a security with the market

the inverse of the slope of the security regression line

a measure of volatility of a security's returns relative to the returns of a broad-based market portfolio of securities.

all of the above

Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5?

a. The PJX5 will cost $2.30 million fully installed and has a 10 year life. It will be depreciated to a book value of $222,654.00 and sold for that amount in year 10.

b. The Engineering Department spent $27,692.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $22,087.00.

d. The PJX5 will reduce operating costs by $376,622.00 per year.

e. CSD’s marginal tax rate is 37.00%.

f. CSD is 68.00% equity-financed.

g. CSD’s 11.00-year, semi-annual pay, 5.43% coupon bond sells for $966.00.

h. CSD’s stock currently has a market value of $23.93 and Mr. Bensen believes the market estimates that dividends will grow at 2.47% forever. Next year’s dividend is projected to be $1.70.

Ting Lu is doing a valuation of the Mako Corporation. Mako has a 10% weighted average cost of capital and a 30% income tax rate. Ting has forecasted the information in the table below to compute Mako’s free cash flow to the firm. Ting assumes that the FCFF that he estimates for year 4 will grow at 3% forever.

Based on this information, what is the intrinsic value of the Mako Corporation?

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.34 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.77 million per year and cost $2.11 million per year over the 10-year life of the project. Marketing estimates 20.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 23.00%. The WACC is 15.00%. Find the NPV (net present value).

What is international monetary cooperation and how is it important to international trade today?

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $24.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.26 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.02 million per year and cost $1.54 million per year over the 10-year life of the project. Marketing estimates 18.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 23.00%. The WACC is 13.00%. Find the IRR (internal rate of return)

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $27.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.22 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.89 million per year and cost $2.09 million per year over the 10-year life of the project. Marketing estimates 19.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 34.00%. The WACC is 14.00%. Find the NPV (net present value).

A non-dividend-paying stock currently sells for $100 per share. The risk-free rate is 8% per annum and the volatility is 13.48% per annum. Consider a European call option on the stock with a strike price of $100 and the time to maturity is one year. a. Calculate u, d, and p for a two-step tree. b. Value the option using a two-step tree. Verify your results with the Option Calculator Spreadsheet.

A project has annual cash flows of $7,500 for the next 10 years and then $11,000 each year for the following 10 years. The IRR of this 20-year project is 11.64%. If the firm's WACC is 11%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Shanken Corp. issued a 20-year, 4.2 percent semiannual bond 3 years ago. The bond currently sells for 89 percent of its face value. The company's tax rate is 22 percent. a. What is the pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places.

A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall's owner plans to sell the property in a year and wants rent at that time to be high so that the property will appear more valuable. Therefore, the store has been offered a "great deal" (owner's words) on a new 5-year lease. The new lease calls for no rent for 9 months, then payments of $2,750 per month for the next 51 months. The lease cannot be broken, and the store's WACC is 12% (or 1% per month).

Should the new lease be accepted? (Hint: Be sure to use 1% per month.)

If the store owner decided to bargain with the mall's owner over the new lease payment, what new lease payment would make the store owner indifferent between the new and old leases? (Hint: Find FV of the old lease's original cost at t = 9; then treat this as the PV of a 51-period annuity whose payments represent the rent during months 10 to 60.) Do not round intermediate calculations. Round your answer to the nearest cent. $

The store owner is not sure of the 12% WACC—it could be higher or lower. At what nominal WACC would the store owner be indifferent between the two leases? (Hint: Calculate the differences between the two payment streams; then find its IRR.) Do not round intermediate calculations. Round your answer to two decimal places.