Question

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

Note: This problem is related to questions 1 to 9

1) NPV for Project X is: *

a) $80

b) 52.37%

c) 70%

d) $52.37

e) None of the above

2) MIRR for Project X is: *

a) 2.65%

b) 26.5%

c) 14.7%

d) 13.8%

e) None of the above

3) The regular payback period for Project X is: *

a) 0.67 years

b) 1.33 years

c) 1.55 years

d) 2.55 years

e) None of the above

4) The discounted payback period for Project X is: *

a) 0.67 years

b) 1.33 years

c) 1.55 years

d) 2.55 years

e) None of the above

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

Answer 1