Question

12) National Home Rentals has a beta of 1.06. a stock price of $17, and recently paid an annual dividend of $.92 a share. The dividend growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model? A) 10.05 percent B) 8.67 percent C) 9.13 percent D) 10.30 percent E) 9.68 percent 13) Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 a share. The common stock has a beta of 1.32 and sells for $41 a share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital? A) 8.09 percent B) 8.64 percent C) 10.18 percent D) 9.30 percent E) 10.56 percent 14) Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred stock, and 50 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287.000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project? A) $116,667 B) $121,802 C) $99,011 D) $104,308 E) $101,488 15) Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the networking capital? A) $149,900 B) $93,500 C) $125,600 D) -$47,500 E) $56,500 16) The Widget Co. purchased all of its fixed assets three years ago for $4 million. These assets can be sold today for $2 million. The current balance sheet shows net fixed assets of $2,500,000,

Answer 1

Q12

Dividend Discount Model growth rate PO Price %3D Ke Required return %3D DO*(1+g) 0.92*(1+0.022) 0.94024 D1 %3D (D1/PO)+g Ke (0.94024/17)+0.022 0.077308 = 7.73% %3D %3D CAPM Risk Free Rate Market Return-Risk Premium 0.112-0.073 0.039 %3D = Cost of Equity Rf+Beta*(Rm-Rf) 0.039+1.06*(0.112-0.039) %3D %3D 0.11638 %3D 11.64% %3D (0.077308+0.11638)/2 Average 0.096844118 9.68%|Answer E