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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. $17.82 b. $18.28 c. $18.75 d. $19.22 e. $19.70
2. 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. $42.25 b. $43.31 c. $44.39 d. $45.50 e. $46.64
5. 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. $2.13 b. $2.36 c. $2.60 d. $2.86 e. $3.14
6. 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%
7. 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%
8. 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%
9. 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%
10. 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%
11. 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%
12. 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%
13. 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 -$1,000 Year 1 $500 Year 2 $500 Year 3 $500 WACC: 10.00% Year: 0 Cash flows: -$1,000 a.$243.43 b.$255.60 c.$268.38 d.$281.80 e.$295.89