# 59 project s has a cost of 10000 and is expected to

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59. Project S has a cost of \$10,000 and is expected to produce benefits (cash flows) of \$3,000 per year for 5 years. Project L costs \$25,000 and is expected to produce cash flows of \$7,400 per year for 5 years. Calculate the two projects’ NPV and PIs, assuming a cost of capital of 10%. Which project would be selected, assuming they are mutually exclusive? 60. What three flaws does the regular payback method have? Does the discounted payback method correct all of those flaws? Explain. The Cost of Capital 61. A company’s preferred stock currently trades for \$50 per share and pays a \$3 annual dividend. Flotation costs are equal to 3% of the gross proceeds. If the company issues preferred stock, what is the cost of that stock? 62. A firm has common stock with D1 = \$3.00; P0 = \$30; g = 5%; and F = 4%. If the firm must issue new stock, what is its cost of external equity, R(e)?

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63. Name some factors the firms can control its effect on cost of capital? 64. Spencer Supplies’ stock is currently selling for \$60 a share. The firm is expected to earn \$5.40 per share this year and to pay a year-end dividend of \$3.60. a. If investors require a 9% return, what rate of growth must be expected for Spencer? b. If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of return, then what will be next year’s EPS? 65. David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of equity capital? Stock and Stock Valuation 66. What’s the difference between a stock’s price and its intrinsic value? 67. If D1 = \$3.00, P0 = \$50, and ^P1 = \$52, what are the stock’s expected dividend yield, expected capital gains yield, and expected total return for the coming year? 68. If D0 = \$4.00, rs = 9%, and g = 5% for a constant growth stock, what are the stock’s expected dividend yield and capital gains yield for the coming year? 69. You buy a share of The Ludwig Corporation stock for \$21.40. You expect it to pay dividends of \$1.07, \$1.1449, and \$1.2250 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of \$26.22 at the end of 3 years. a. Calculate the growth rate in dividends. b. Calculate the expected dividend yield. c. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock’s expected total rate of return? 70. Suppose D0 = \$1.15 and rs = 10%. The expected growth rate from Year 0 to Year 3 (g0 to3) = 30%, and the constant rate beyond Year 3 is gL = 8%. What are the expected dividends for Year 1and Year 3? What is the expected horizon value price at Year 3 (^P3)? What is P0? Financial Planning 71. Describe how do the following factors affect external capital requirements: (a) payout ratio (b) capital intensity (c) profit margin 72. The Barnsdale Corporation has the following ratios: A0*/S0 = 1.6; L0*/S0 = 0.4; profit margin = 0.10; and dividend payout ratio = 0.45, or 45%. Sales last year were \$100 million. Assuming that these ratios will remain constant, use the AFN equation to
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• Summer '14
• Prof Gter
• Economics, Ratio, total assets, inventory turnover ratio

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