A stock is expected to pay a dividend of $0.75

1. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is the current stock price?a. $17.82b. $18.28c. $18.75d. $19.22e. $19.702. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock’s expected capital gains yield for the coming year?a. 6.50%b. 6.83%c. 7.17%d. 7.52%e. 7.90%3. McDonnell Manufacturing is expected to pay a dividend of $1.50 per share at the end of the year (D1 = $1.50). The stock sells for $34.50 per share, and its required rate of return is 11.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?a. 6.46%b. 6.63%c. 6.80%d. 6.97%e. 7.15%4. The Zumwalt Company is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company’s beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?a. $42.25b. $43.31c. $44.39d. $45.50e. $46.645. McLaughlin Inc.’s stock has a required rate of return of 10.50%, and it sells for $67.50 per share. McLaughlin’s dividend is expected to grow at a constant rate of 7.00% per year. What is the expected year-end dividend, D1?a. $2.13b. $2.36c. $2.60d. $2.86e. $3.146. You have been assigned the task of using the free cash flow model to estimate Petry Corporation’s intrinsic value. Petry’s WACC is 10.00%, its end-of-year free cash flow (FCF) is expected to be $150.0 million, the FCFs are expected to grow at a constant rate of 6.00% a year in the future, the company has $200 million of long-term debt plus preferred stock, and it has 50 million shares of common stock outstanding. What is Petry’s estimated intrinsic value per share of common stock?a. $66.12b. $68.52c. $71.00d. $73.49e. $76.067. WWW Servers just paid a dividend of D0 = $1.00. Analysts expect the company’s dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on WWW’s stock is 9.00%. What is the best estimate of the stock’s current intrinsic value?a. $31.50b. $32.31c. $33.14d. $33.99e. $34.848. Hettenhouse Company’s perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?a. 9.27%b. 9.65%c. 10.04%d. 10.44%e. 10.86%9. P. Lange Inc. hired your consulting firm to help them estimate the cost of equity. The yield on Lange’s bonds is 7.25%, and your firm’s economists believe that the cost of equity can be estimated using a risk premium of 3.50% over a firm’s own cost of debt. What is an estimate of Lange’s cost of equity from retained earnings?a. 10.75%b. 11.18%c. 11.63%d. 12.09%e. 12.58%10. You were hired as a consultant to Kroncke Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?a. 9.48%b. 9.78%c. 10.07%d. 10.37%e. 10.68%11. To help finance a major expansion, Delano Development Company sold a noncallable bond several years ago that now has 15 years to maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells at a price of $1,025, and it has a par value of $1,000. If Delano’s tax rate is 40%, what component cost of debt should be used in the WACC calculation?a. 5.11%b. 5.37%c. 5.66%d. 5.96%e. 6.25%12. Kovach Lumber Company hired you to help estimate its cost of capital. You were provided with the following data: D1 = $1.10; P0 = $27.50; g = 6.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock?a. 9.41%b. 9.80%c. 10.21%d. 10.62%e. 11.04%13. LePage Co. expects to earn $2.50 per share during the current year, its expected payout ratio is 55%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?a. 11.81%b. 12.43%c. 13.05%d. 13.71%e. 14.39%14. You were hired as a consultant to Quigley Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 12.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley’s WACC?a. 8.29%b. 8.62%c. 8.96%d. 9.32%e. 9.69%15. Edmondson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s projected NPV is negative, it should be rejected.Cash flows:Year 0 -$1,000Year 1 $500Year 2 $500Year 3 $500WACC: 10.00%Year: 0Cash flows: -$1,000a. $243.43b. $255.60c. $268.38d. $281.80e. $295.8916. Wachowicz Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after the 4th year. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if the cost of capital is 10%, by what amount will the better project increase the firm’s value?a. $677.69b. $1,098.89c. $1,179.46d. $1,237.76e. $1,312.3117. Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $60,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company’s cost of capital is 11%. What is the NPV (on a 6-year extended basis) of the system that adds the most value?a. $17,298.30b. $22,634.77c. $31,211.52d. $38,523.43e. $46,143.2118. Last month, Smith Systems Inc. decided to accept the project whose cash flows are shown below. However, before actually starting the project, the Federal Reserve took actions that lowered interest rates and therefore Smith’s WACC. By how much did the change in the WACC affect the project’s forecasted NPV? Assume that the Fed action does not affect the cash flows, and note that a project’s projected NPV can be negative, in which case it should be rejected.Cash flows:Year 0 -$1,000Year 1 $500Year 2 $500Year 3 $500New WACC: 8.00%Year: 0Cash flows: -$1,000a. $57.18b. $60.19c. $63.36d. $66.69e. $70.0319. Sorenson Stores is considering a project that has the following cash flows:Year Cash Flow0 CF0 = ?1 $2,0002 3,0003 3,0004 1,500The project has a payback of 2.5 years, and the firm’s cost of capital is 12%. What is the project’s NPV?a. $577.68b. $765.91c. $1,049.80d. $2,761.32e. $3,765.9120. The Federal Reserve recently shifted its monetary policy, causing Lasik Vision’s WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forec
asted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project’s projected NPV can be negative, in which case it should be rejected.New WACC: 7.00% Old WACC: 10.00%Year: 0 1 2 3Cash flows: -$1,000 $500 $520 $540a. $72.27 b. $75.88 c. $79.68 d. $83.66 e. $87.85