In: Finance
Company B has three Projects it can choose from: Projects X, Y
and Z. The following information is available regarding Project
X:
Years 0 1 2 3
CF -100 80 60 40
The company’s capital structure is distributed equally between debt
and preferred stock and the remaining 40% goes to common stock. It
has also the following information:
1- After tax cost of debt: 3%. Tax rate: 40%
2- Preferred stocks are selling at $70 per share and pay a dividend
of $7 per share
3- Common stocks are selling at $60 per share, pay a year-end
dividend of $4 per share and grow at a constant rate of
8.59%.
The company is also considering another two projects “Y” & “Z”
with the following information:
Criteria Project Y Project Z
NPV $40 $67
MIRR 11% 20%
IRR -2.0% 18.7%
Regular Payback 2.23 years 1.77 years
5) Assuming that the three projects X, Y & Z are independent, which project (s) should the company choose: *
a) Project Z
b) Projects X and Z
c) Projects X, Y and Z
d) Projects Y and Z
e) Reject all projects
6) Assuming that the three projects X, Y & Z are mutually exclusive, which project (s) should the company choose: *
a) Project Z
b) Project X
c) Projects X, Y and Z
d) Project Y
e) Reject all projects
7) Assuming that the three projects X, Y & Z are independent, based on MIRR criteria which project (s) should the company choose: *
a) Project Z
b) Project X
c) Projects X, Y and Z
d) Project Y
e) Reject all projects
8) Assuming that the three projects X, Y & Z are mutually exclusive, based on MIRR criteria which project (s) should the company choose: *
a) Project Z
b) Project X
c) Projects X, Y and Z
d) Project Y
e) Reject all projects
9) If IRR for Project X is 17.95%, and the three project X, Y & Z are independent, then based on IRR criteria which project (s) should the company choose: *
a) Project Z
b) Projects X and Z
c) Projects X, Y and Z
d) Projects Y and Z
e) Reject all projects