Question 1: Sorenson Stores is considering a project that has the following cash flows:
Year Cash Flows
1 $2,000
2 $3,000
3 $3,000
4 $1,500
The project has a payback of 2.5 years, and the firm's cost of capital is 12%. What is the project's NPV?
Question 2: You work for Smith Company as a consultant. Kroncke target capital structure is 30%debt, 20% preferred, and 50% common equity. The after-tax cost of debt is 8%, the cost of preferred is 6.5%, and the cost of retained earnings is 13.25%. The firm will not be issuing any new stock. What is its WACC?
a. 10.07%
b. 10.37%
c. 9.48%
d. 10.68%
e. 10.325%
Question 3: If Do = $2.75, g (which is constant) = 3% and Po - $36, what is the expected total return for the coming year?
a. 9.82%
b. 10.07%
c. 10.33%
d. 10.60%
e. 10.87%
Question 4: 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?