Project Week 6

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1. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

a.$23.11
b.$23.70
c.$24.31
d.$24.93
e.$25.57

2. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock’s expected dividend yield for the coming year?

a.4.12%
b.4.34%
c.4.57%
d.4.81%
e.5.05%

3. If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock’s expected total return for the coming year?

a.8.37%
b.8.59%
c.8.81%
d.9.03%
e.9.27%

4. Canterberry's preferred stock pays a dividend of $0.75 per quarter. If the price of the stock is $39.00, what is its nominal (not effective) annual rate of return?

a.8.03%
b.7.69%
c.8.45%
d.8.67%
e.7.89%

5. Johnson's preferred stock pays a dividend of $1.25 per quarter, and it sells for $60.00 per share. What is its effective annual (not nominal) rate of return?

a.8.32%
b.6.82%
c.7.03%
d.8.60%
e.7.47%

6. Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

a.Increase the dividend payout ratio for the upcoming year. b.Increase the percentage of debt in the target capital structure. c.Increase the proposed capital budget.
d.Reduce the amount of short-term bank debt in order to increase the current ratio. e.Reduce the percentage of debt in the target capital structure.

7. LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

a.Project B, which is of below-average risk and has a return of 8.5%. b.Project C, which is of above-average risk and has a return of 11%. c.Project A, which is of average risk and has a return of 9%. d.None of the projects should be accepted.

e.All of the projects should be accepted.

8. Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than an average project, in terms of both its beta risk and its total risk. Which of the following statements is CORRECT?

a.The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return. b.The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return. c.Riskier-than-average projects should have their expected returns increased to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the adjustment. d.The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project. e.Capital budgeting projects should be evaluated solely on the basis of their total risk. Thus, insufficient information has been provided to make the accept/reject decision.

9. Which of the following statements is CORRECT?

a.When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation. b.When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation. c.Because of...
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