Question

22. Cornell Enterprises is considering a project that has the following cash fnow and WACC data What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 01 2 Cash flows $825 $450 $460 $470 a. $396.72 b. $317.37 C. $336.42 d. $323.72 e. $257.07 23. the projects Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 8.75% Year 0 Cash flows -$1,000$450$450 $450 13.74% 11.41% 14,16% 12.23% 16.90% b. С. d. The Ramírez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (r) is 12%, what is the best estimate of the current stock price? a. $42.76 b. $38.77 c. $36.24 d. $39.14 e. $36.60 24.

Answer 1

Answer to Question 22:

WACC = 10%

NPV = -$825 + $450/1.10 + $460/1.10^2 + $470/1.10^3
NPV = $317.37

Answer to Question 23:

WACC = 8.75%

Future Value of Cash Inflows = $450 * 1.0875^2 + $450 * 1.0875 + $450
Future Value of Cash Inflows = $1,471.57

MIRR = (Future Value of Cash Inflows / Present Value of Cash Outflow)^(1/n) - 1
MIRR = ($1,471.57 / $1,000)^(1/3) - 1
MIRR = 1.47157^(1/3) - 1
MIRR = 1.1374 - 1
MIRR = 0.1374 or 13.74%

Answer to Question 24:

Last Dividend, D0 = $1.75
Required Return, rs = 12%

Growth rate for next 2 years is 15%, and a constant growth rate (g) of 6% thereafter

D1 = $1.7500 * 1.15 = $2.0125
D2 = $2.0125 * 1.15 = $2.3144
D3 = $2.3144 * 1.06 = $2.4533

P2 = D3 / (rs - g)
P2 = $2.4533 / (0.12 - 0.06)
P2 = $40.8883

P0 = $2.0125/1.12 + $2.3144/1.12^2 + $40.8883/1.12^2
P0 = $36.24

Current stock price is $36.24

Answer 2

SOLUTION ;

Q22 :

r = WACC =10% = 0.1 

=> 1 + r = 1.1

NPV 

= - 825 + 450/1.1 + 460/1.1^2 + 470/1.1^3 

= 317.37 ($) 

So, Project’s NPV is = $317.37 : Option (b) . (ANSWER)

(As NPV is positive, project should be accepted)

Q23 :

Period of project, n = 3 years

Initial investment = 1000 ($) (it is cash outflow)

Cash inflows = $450 each year for 3 years.

r = WACC = 8.75% = 0.0875

=> 1 + r = 1.0875

FV of positive cash inflows = 450(1.0875^2 + 1.0875^1 + 1) = 1471.57 ($)

PV of cash outflow = 1000 ($)

So,

MIRR 

= (FV of cash inflows / PV of cash outflows)^(1/n) - 1

= (1471.57/1000)^(1/3) - 1

= 0.1374

= 13.74% .

MIRR is = 13.74%  : Option (a) (ANSWER).

Q24.

Required rate of return, r = 12% = 0.12 

=> 1 + r = 1.12

Dividend growth rate, g = 15% for 2 years and thereafter 6% forever.

Last dividend, D0 = 1.75($) 

So,

D1 = 1.75*1.15 = 2.0125  ($)

D2 = 2.0125*1.15 = 2.314375 ($)

D3 = 2.314375*1.06 = 2.4532375 ($)

Price at year 2 end , P(2) = D3/(r - g for ever) = 2.4532375/(0.12 - 0.06)

= 40.887 ($)

Current price, P0

= PV of future dividends and horizon price at year 2 end.

= D1/1.12 + D2/1.12^2 + P2/1.12^2

= 2.0125/1.12 + 2.314375/1.12^2 + 40.887/1.12^2

= 36.24 ($)

So, current price estimate is = $36.24 : Option (c) (ANSWER)