FNCE 101 - Finance Problem Sets

FNCE 101: Dr Chiraphol New Chiyachantana Problem Set # 8 (Chapter 16) 1. Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given...

FNCE 101: Dr Chiraphol New Chiyachantana Problem Set # 8 (Chapter 16) 1. Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below. What is the optimal capital structure for ZPC? (Debt/Total Assets = 50%) Debt/Total Assets Expected EPS ks 20% $2.50 15.0% 30 3.00 15.5 40 3.25 16.0 50 3.75 17.0 70 4.00 18.0 2. Given the following choices, what is the optimal capital structure for Chip Co.? (Assume that the company’s growth rate is 2 percent.) (25% debt; 75% equity) Dividends Cost of Debt Ratio Per Share Equity (ks) 0% $5.50 11.5% 25 6.00 12.0 40 6.50 13.0 50 7.00 14.0 75 7.50 15.0 FNCE 101 Problem Set # 1 (Chapter 12 and 13) 1. Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50. In addition, the stock paid dividends of $0.20 per share. Calculate Little John's dividend yield, capital gain yield, and total rate of return for the year. (DY: 10.53%, CGY= 31.58%, TR= 42.11%) 2. Calculate the required rate of return for Mercury Inc., assuming that investors expect a 5 percent rate of inflation in the future. The real risk-free rate is equal to 3 percent, and the market risk premium is 5 percent. Mercury has a beta of 2.0, and its realized rate of return has averaged 15 percent over the last 5 years. (18%) 3. Partridge Plastic’s stock has an estimated beta of 1.4, and its required rate of return is 13 percent. Cleaver Motors’ stock has a beta of 0.8, and the risk-free rate is 6 percent. What is the required rate of return on Cleaver Motors’ stock? (10.0%) 4. Assume that the risk-free rate is 5 percent and that the market risk premium is 7 percent. If a stock has a required rate of return of 13.75 percent, what is its beta? (1.25) 5. A stock has an expected return of 12.25 percent. The beta of the stock is 1.15, and the risk-free rate is 5 percent. What is the market risk premium? (6.30%) 6. A portfolio is entirely invested in Buzz's Bauxite Boring Equity, which is expected to return 16%, and Zum's Inc. bonds, which are expected to return 8%. Sixty percent of the funds are invested in Buzz's and the rest in Zum's. What is the expected return on the portfolio? (12.8%) 7. You have been managing a $1 million portfolio. The portfolio has a beta of 1.6 and a required rate of return of 14 percent. The current risk-free rate is 6 percent. Assume that you receive another $200,000. If you invest the money in a stock with a beta of 0.6, what will be the required return on your $1.2 million portfolio? (13.17%) 8. You are an investor in common stocks, and you currently hold a well-diversified portfolio with an expected return of 12 percent, a beta of 1.2, and a total value of $9,000. You plan to increase your portfolio by buying 100 shares of SMU Company at $10 a share. SMU Company has an expected return of 20 percent with a beta of 2.0. What will be the expected return and the beta of your portfolio after you purchase the new stock? ( k̂p = 12.8%; bp = 1.28) 9. An investor is forming a portfolio by investing $50,000 in stock A, which has a beta of 1.50, and $25,000 in stock B, which has a beta of 0.90. The return on the market is equal to 6 percent, and Treasury bonds have a yield of 4 percent. What is the required rate of return on the investor’s portfolio? (6.6%) 10. You have a $1,200 portfolio, which is invested in two stocks and one risk-free asset. $300 is invested in stock A, which has a beta of 1.1. Stock B has a beta of.80. How much should be invested in the risk-free asset if you want to achieve a portfolio beta of.555? ($480) FNCE 101 Problem Set # 2 (Chapter 5 and 6) 1. What is the present value of a security which promises to pay you $3,000 in 15 years? Assume that you can earn 9 percent if you were to invest in other securities of equal risk. ($823.61) 2. What is the future value of an 8-year ordinary annuity which promises to pay you $300 each year? The rate of interest is 6 percent. ($2,969.24) 3. Your parents are planning to retire in 15 years. They currently have $247,000, and they would like to have $900,000 when they retire. What annual rate of interest would they have to earn on their $247,000 in order to reach their goal, assuming they save no more money? (9%) 4. Your broker offers to sell you a note for $ 47,505.05 that will pay you $5,000 per year for 25 years. If you buy that note, what interest rate (to the closest percent) will you be earning? (9.42%) 5. While you were a student in college, you borrowed $34,000 in student loans at an interest rate of 6.5 percent, compounded annually. If you repay $4,000 per year, how long, to the nearest year, will it take you to repay the loan? (13 years) 6. SG Trucking is financing a new truck with a loan of $25,000 to be repaid in 10 annual end-of-year installments of $3,895.50. What annual interest rate is the company paying? (9%) 7. You are considering buying a new car. The sticker price is $15,000, and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments? ($276.21) 8. You are thinking about buying a car, and a local bank is willing to lend you $18,000 to buy the car. Under the terms of the loan, it will be fully amortized over 6 years (72 months), and the nominal rate of interest will be 15 percent, with interest paid monthly. What would be the monthly payment on the loan? ($ 380.61) 9. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? ($1,126) 10. Linens, Etc. currently pays an annual dividend of $1.60 per share. At what rate must the company increase its dividend if it wants to pay $2.40 a share three years from now? (14.47 percent) 11. You just purchased a 10-year annuity at a cost of $45,000. The annuity will pay you $500 on the first of each month, commencing today. What rate of return are you earning on this investment? (6.13 percent) 12. Bill plans to deposit $200 into a bank account at the end of every month. The bank account has a nominal interest rate of 8 percent and interest is compounded monthly. How much will Bill have in the account at the end of 2½ years? ($ 6,617.77) 13. You have $2,000 invested in a bank account that pays a 4 percent nominal annual interest with daily compounding. How much money will you have in the account at the end of July (in 132 days)? (Assume there are 365 days in each year.) ($2,029.14) 14. What is the future value of a 3-year annuity due, which promises to pay you $500 each year? Assume that all payments are reinvested at 6 percent a year until year 3. ($ 1,687.30) 15. You have the opportunity to buy a perpetuity that pays $1,000 annually. Your required rate of return  on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of..? ($6,666.67) 16. If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compound interest at 7.5% for three years, which one will pay more and by how much? (Simple Interest= $2,400; Compound Interest=$2,422.97; Difference = $2,422.97 - $2,400 = $22.97) 17. An investment pays you $200 at the end of each of the next three years. The investment will then pay you $500 at the end of Year 4, $400 at the end of Year 5, and $700 at the end of Year 6. If the rate of interest earned on the investment is 10 percent, what is its present value? ($ 1,482.38) 18. Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows? ($11,714) 19. As an excellent student in environmental ecology, you have been awarded the "Clean Effluent Prize" by the state agency. You (or your estate) will receive $300 forever from the state, or the agency will allow you to choose $400 over the next 25 years. The market rate of interest is 6%. What is the value of the two options respectively? ($ 5,000; $5,113.34) 20. Susan just graduated and plans to work for 10 years and then leave for Europe. She figures that she can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. In addition, her family has just given her a $5,000 graduation gift. The market interest rate is 8 percent compounded annually. What is the present value of this cash flow? ($14,427.45) FNCE 101 Problem Set # 3 (Chapter 8) 1. On January 1, 2003 Westman Fuji sold for $40. On January 1, 2004 Westman Fuji sold for $39.50. During 2003, Westman Fuji paid four quarterly dividends of $1.50. What is Fuji's dividend yield and capital gain yield? (15.00%, -1.25%) 2. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock? ($57.50) 3. Thames Inc.'s most recent dividend was $2.40 per share. The dividend is expected to grow at a rate of 6 percent per year. The risk-free rate is 5 percent and the return on the market is 9 percent. If the company's beta is 1.3, what is the price of the stock today? ($60.57) 4. McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year (D1 = $1.00). The stock sells for $20 per share and its required rate of return is 11 percent. The dividend is expected to grow at a constant rate, g, forever. What is the growth rate, g, for this stock? (6%) 5. A stock with a required rate of return of 10 percent sells for $30 per share. The stock’s dividend is expected to grow at a constant rate of 7 percent per year. What is the expected year-end dividend, D1, on the stock? ($0.90) 6. Cartwright Brothers' stock is currently selling for $40 a share. The stock is expected to pay a $2 dividend at the end of the year. The stock's dividend is expected to grow at a constant rate of 7 percent a year forever. The risk-free rate (kRF) is 6 percent and the market risk premium (kM - kRF) is also 6 percent. What is the stock's beta? (1.00) 7. Yohe Technology’s stock is expected to pay a dividend of $2.00 a share at the end of the year. The stock currently has a price of $40 a share, and the stock’s dividend is expected to grow at a constant rate of g percent a year. The stock has a beta of 1.2. The market risk premium, kM – kRF, is 7 percent and the risk-free rate is 5 percent. What is the expected price of Yohe’s stock 5 years from today? ($59.87) 8. The Textbook Production Company has been hit hard due to increased competition. The company’s analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that ks = 11 percent and D0 = $2.00. What will be the price of the company’s stock three years from now? ($10.18) 9. Allegheny Publishing’s stock is expected to pay a year-end dividend, D1, of $4.00. The dividend is expected to grow at a constant rate of 8 percent per year, and the stock’s required rate of return is 12 percent. Given this information, what is the expected price of the stock, eight years from now? ($185.09) 10. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? ($118.35) 11. The last dividend paid by Klein Company was $1.00. Klein’s growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein’s required rate of return on equity (ks) is 12 percent. What is the current price of Klein’s common stock? ($50.16) 12. A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company’s beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company’s stock is expected to remain constant. What is the current stock price? ($10.98) 13. Garcia Inc. has a current dividend of $3.00 per share (D0 = $3.00). Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year. The company’s cost of equity capital is estimated to be 15 percent. What is Garcia’s current stock price? ($ 95.42) 14. Mack Industries just paid a dividend of $1.00 per share (D0 = $1.00). Analysts expect the company’s dividend to grow 20 percent this year (D1 = $1.20) and 15 percent next year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company’s stock is 12 percent. What should be the company’s current stock price? $18.67) 15. The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20 percent, what should be the stock's market value? ($ 25) 16. A share of preferred stock pays a quarterly dividend of $2.50. If the price of this preferred stock is currently $50, what is the nominal annual rate of return? (20%) 17. A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. Based on the most recent returns, the stock company’s beta is approximately 1.2. The risk-free rate is 2.40 percent, and the market risk premium is 8 percent. Calculate the expected price of the stock. ($17.90) 18. Charlene owns stock in a company which has consistently paid a growing dividend over the last five years. The first year Charlene owned the stock, she received $1.71 per share, and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last five years? (14%) 19. Carbon Fiber, Inc. is expected to pay annual dividends of $.60, $1.30, $1.80, and $2.00 a share over the next four years, respectively. After that, the dividend is expected to increase by 2 percent annually. What is one share of Carbon Fiber stock worth today if similar stocks are yielding a 9 percent return? ($25.09) 20. A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 20% for the next year and 10% the year after that before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock. ($17.90) FNCE 101 Problem Set # 4 (Chapter 7) 1. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your nominal annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond? ($1,124.62) 2. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? ($1,207.57) 3. You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If the current price of the bond is equal to $1,124.62 with semiannual compounding, how much is the YTM? (10%) 4. A corporate bond has a face value of $1,000 and pays a $50 coupon every six months (that is, the bond has a 10 percent semiannual coupon). The bond matures in 12 years and sells at a price of $1,080. What is the bond’s nominal yield to maturity? (8.90%) 5. You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and annual interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain? (15) 6. Which of the following amounts is closest to the value of a bond described in The Wall Street Journal as 9s 2032? It is January 1, 2024, and the appropriate interest rate is 11%. Assume that the bond matures in the same month as when the quote is given, that interest payments are made twice a year and that an interest payment has just been made. ($ 895.38) 7. The Lo Sun Corporation offers a 6 percent bond with a current market price of $875.05. The yield to maturity is 7.34 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures? (16 years) 8. Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at that time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the risk- free long-term government bonds are currently yielding 7.8 percent, then at what rate should Rollincoast expect to issue new bonds? (9.2%) 9. A bond with a face value of $1,000 matures in 10 years. The bond has an 8 percent annual coupon and a yield to maturity of 10 percent. If market interest rates remain at 10 percent, what will be the price of the bond two years from today? (Hint: Use N=8: $ 893.30) 10. A 12-year bond has an 8 percent annual coupon and a face value of $1,000. The bond has a yield to maturity of 7 percent. If the yield to maturity remains at 7 percent, what will be the price of the bond three years from today? ($1,065.15) 11. A 20-year bond with a par value of $1,000 has a 9 percent annual coupon. The bond currently sells for $925. If the bond’s yield to maturity remains at its current rate, what will be the price of the bond 5 years from now? (Hint: Find YTM then Value (5): $ 933.09) 12. A bond matures in 12 years and pays an 8 percent annual coupon. The bond has a face value of $1,000 and currently sells for $985. What is the bond’s yield to maturity? (Yield to maturity = 8.20%) FNCE 101 Problem Set # 5 (Chapter 24 and 25) 1. A stock currently sells for $75 per share. A call option on the stock with an exercise price $70 currently sells for $5.50. The call option is (In-the-money) 2. A stock currently sells for $75 per share. A put option on the stock with an exercise price $70 currently sells for $0.50. The put option is (Out-of-the-money) 3. Consider a stock that is currently trading at $50. Calculate the intrinsic value for a put option that has an exercise price of $35. ($0) 4. Consider a stock that is currently trading at $25. Calculate the intrinsic value for a call option that has an exercise price of $35. ($0) FNCE 101 Problem Set # 6 (Chapter 14) 1. Blair Brothers’ stock currently has a price of $50 per share and is expected to pay a year-end dividend of $2.50 per share (D1 = $2.50). The dividend is expected to grow at a constant rate of 4 percent per year. The company has insufficient retained earnings to fund capital projects and must, therefore, issue new common stock. The new stock has an estimated flotation cost of $3 per share. What is the company’s cost of equity capital? (9.32%) 2. Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The current market price of the firm’s stock is P0 = $28; its last dividend was D0 = $2.20, and its expected dividend growth rate is 6 percent. What will Allison’s marginal cost of retained earnings, ks, be? (14.3%) 3. A company just paid a $2.00 per share dividend on its common stock (D0 = $2.00). The dividend is expected to grow at a constant rate of 7 percent per year. The stock currently sells for $42 a share. If the company issues additional stock, it must pay its investment banker a flotation cost of $1.00 per share. What is the cost of external equity, ks(SEO)? (12.22%) 4. What is the company’s WACC? The company has collected the following information: (9.66%)  Its capital structure consists of 40 percent debt and 60 percent common equity.  The company has 20-year bonds outstanding with a 9 percent annual coupon trading at par.  The company’s tax rate is 40 percent.  The risk-free rate is 5.5 percent.  The market risk premium is 5 percent.  The stock’s beta is 1.4. 5. What is Trojan’s WACC? Trojan Services’ CFO is interested in estimating the company’s WACC and has collected the following information: (9.89%)  The company has bonds outstanding that mature in 26 years with an annual coupon of 7.5 percent. The bonds have a face value of $1,000 and sell in the market today for $920.  The risk-free rate is 6 percent.  The market risk premium is 5 percent.  The stock’s beta is 1.2.  The company’s tax rate is 40 percent.  The company’s target capital structure consists of 70 percent equity and 30 percent debt.  The company uses the CAPM to estimate the cost of equity and does not include flotation costs as part of its cost of capital. 6. Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company’s long-term bonds have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to determine the cost of equity. Flaherty’s common stock currently trades at $45 per share. The year-end dividend (D1) is expected to be $2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common stock to help fund this year’s projects. The flotation cost on new common stock issued is 10 percent, and the company’s tax rate is 40 percent. What is the company’s weighted average cost of capital, WACC? (10.73%) 7. Charlie Co. has 15,000 shares of common stock outstanding at a market price of $21 a share. There are 5,000 shares of 6 percent preferred stock outstanding at a market price of $42 a share. The firm has a bond issue outstanding with a face value of $200,000 which is selling at 98 percent of face value. The firm’s tax rate is 34 percent. What weight should be given to the common stock when computing the weighted average cost of capital for this company? (44%) 8. Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent, and the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company’s tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw’s stock? (1.35) 9. SunDry Company has shares of preferred stock outstanding. The current preferred stock price is $80 per share, and the company pays preferred stock dividends of $6 per share. If the growth rate in the economy is expected to remain at a constant rate of 3%, what is the market rate of return for the preferred stock? (7.5%) 10. Intel Co. has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent, and the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company’s tax rate is 40 percent. What is the beta on Intel’s stock? (1.35) 11. A stock analyst has obtained the following information about MakeMyTrip Limited, an online travel company in India.  The company has noncallable bonds with 20 years maturity remaining and a maturity value of $1,000. The bonds have a 12 percent annual coupon and currently sell at a price of $1,273.8564.  The current risk-free rate is 6.35 percent, and the expected return on the market is 11.35 percent. The company beta is 1.3585. The company’s tax rate is 35 percent.  The company anticipates that its proposed investment projects will be financed with 70 percent debt and 30 percent equity. What is the company’s estimated weighted average cost of capital (WACC)? (8.04%) 12. What is the company’s weighted average cost of capital (WACC)? Hatch Corporation’s target capital structure is 40 percent debt, 50 percent common stock, and 10 percent preferred stock. Information regarding the company’s cost of capital can be summarized as follows: (9.70%)  The company’s bonds have a nominal yield to maturity of 7 percent.  The company’s preferred stock sells for $42 a share and pays an annual dividend of $4 a share.  The company’s common stock sells for $28 a share and is expected to pay a dividend of $2 a share at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 7 percent a year.  The firm will be able to use retained earnings to fund the equity portion of its capital budget.  The company’s tax rate is 40 percent. 13. ABC Company has asked a group of financial consultants to help them determine their component and average costs of capital. The consultants have been able to gather the following information: The current price of the firm’s 10-year, $1000 face value, and 10% annual coupon bonds are $1,134. The price of the firm’s preferred stock is $70, and it pays dividends of $8 per year. The common stock has a current price of $27 per share, expects to pay $2 per share in annual dividends next year, and has an expected annual growth rate in dividends of 6%. The market value of the sources of financing is debt at $2,500,000, common stock at $6,000,000, and preferred stock at $500,000. The firm is in a 40% tax bracket.  What is the yield to maturity of the firm’s debt? (8%)  What is the firm’s after-tax cost of debt? (4.8%)  What is the firm’s cost of equity? (13.4%)  What is the firm’s weighted average cost of capital? (10.9%) FNCE 101 Problem Set # 7 (Chapter 9 and 10) 1. The Seattle Corporation has been presented with an investment opportunity that will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. Assume cash f flows occur evenly during the year, 1/365th each day. What is the payback period for this investment? (4.86 years) 2. After getting her degree in marketing and working for 5 years for a large department store, Sally started her own specialty shop in orchard mall. Sally’s current lease calls for payments of $1,000 at the end of each month for the next 60 months. Now the landlord offers Sally a new 5-year lease that calls for zero rent for 6 months, then rental payments of $1,050 at the end of each month for the next 54 months. Sally’s cost of capital is 11 percent. By what absolute dollar amount would accepting the new lease change Sally’s theoretical net worth? ($3,803.06) 3. Las Vegas Sands Corp. is faced with two independent investment opportunities. The corporation has an investment policy that requires acceptable projects to recover all costs within 3 years. The corporation uses the discounted payback method to assess potential projects and utilizes a discount rate of 10 percent. The cash flows for the two projects are: Project A Project B Year Cash Flow Cash Flow 0 -$100,000 -$80,000 1 40,000 50,000 2 40,000 20,000 3 40,000 30,000 4 30,000 0 In which investment project(s) should the company invest? (Project B only) 4. The Seattle Corporation has been presented with an investment opportunity that will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What is the NPV for this investment? ($ 51,138) 5. As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Project X Project Z Year Cash Flow Cash Flow 0 -$100,000 -$100,000 1 50,000 10,000 2 40,000 30,000 3 30,000 40,000 4 10,000 60,000 If Denver’s cost of capital is 15 percent, which project would you choose? (Neither project) 6. Braun Industries is considering an investment project that has the following cash flows: Year Cash Flow 0 -$1,000 1 400 2 300 3 500 4 400  The company’s WACC is 10 percent. What is the project’s payback, internal rate of return (IRR), and net present value (NPV)? (Payback = 2.6, IRR = 21.22%, NPV = $260) 7. Two projects being considered are mutually exclusive and have the following projected cash flows: Project A Project B Year Cash Flow Cash Flow 0 -$50,000 -$50,000 1 15,625 0 2 15,625 0 3 15,625 0 4 15,625 0 5 15,625 99,500 If the required rate of return on these projects is 10 percent, which would be chosen and why? (Project B because it has the higher NPV) 8. Oak Furnishings is considering a project that has an up-front cost and a series of positive cash flows. The project’s estimated cash flows are summarized below: Project Year Cash Flow 0 ? 1 $500 million 2 300 million 3 400 million 4 600 million The project has a regular payback of 2.25 years. What is the project’s internal rate of return (IRR)? (33.5%) 9. A project has the following net cash flows: Project Year Cash Flow 0 -$ X 1 150 2 200 3 250 4 400 5 100 At the project’s WACC of 10 percent, the project has an NPV of $124.78. What is the project’s internal rate of return? (16.38%) 10. Tim is considering two projects both of which have an initial cost of $12,000 and total cash inflows of $15,000. The cash inflows of project A are $1,000, $2,000, $4,000, and $8,000 over the next four years, respectively. The cash inflows for project B are $8,000, $4,000, $2,000 and $1,000 over the next four years, respectively. Which one of the following statements is correct if Tim requires a 10 percent rate of return and has a required payback period or discounted payback period of 3 years? I. Tim should accept project A because it has a payback period of 2.65 years. II. Tim should reject project A because it never pays back at a 10 percent rate. III. Tim should accept project B as long as the discount rate is 10 percent or less. IV. Tim should accept project B because it has a discounted payback period of 3.95 years. (II and III only)