GRADING SUMMARY

These are the automatically

computed results of your exam.
Grades for essay questions, and
comments from your instructor, are
in the "Details" section below.

Question Type:
Multiple Choice
Essay

GRADE DETAILS

Date Taken:
10/12/2011
Time Spent:
4 h , 49 min , 11 secs
Points Received: 90 / 100 (90%)

# Of Questions:
9
1

# Correct:
9
N/A

Question :
1.

Student Answer:
$16.28
Explanation:Chapter 7
Points Received:

$16.70

$17.13

$17.57

$18.01

Instructor

5.13%

5.39%

Instructor

8.89%

Instructor

10 of 10

Comments:

2.

Question :

Student Answer:
4.42%
Explanation:Chapter 7
Points Received:

4.66%

4.89%

10 of 10

Comments:

3.

Question :

Student Answer:
8.03%
Explanation:Chapter 7

8.24%

8.45%

8.67%

1. (TCO D) A share of common stock just paid a dividend of $1.00. If the expected long-run growth
rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
(Points : 10)
$16.28
$16.70
$17.13
$17.57
$18.01
2. (TCO D) If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stocks expected
total return for the coming year? (Points : 10)
7.54%
7.73%
7.93%
8.13%
8.34%
3. (TCO D) Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per
share. What is its effective annual (not nominal) rate of return? (Points : 10)
6.62%
6.82%

7.03%
7.25%
7.47%
4. (TCO E) Bankston Corporation forecasts that if all of its existing financial policies are followed, its
proposed capital budget would be so large that it would have to issue new common stock. Since new
stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which
of the following actions would REDUCE its need to issue new common stock? (Points : 10)
Increase the dividend payout ratio for the upcoming year.
Increase the percentage of debt in the target capital structure.
Increase the proposed capital budget.
Reduce the amount of short-term bank debt in order to increase the current ratio.
Reduce the percentage of debt in the target capital structure.
5. (TCO E) Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division As cost
of capital is 10.0%, Division Bs cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of
Division As projects are equally risky, as are all of Division B's projects. However, the projects of
Division A are less risky than those of Division B. Which of the following projects should the firm
accept? (Points : 10)
A Division B project with a 13% return.
A Division B project with a 12% return.
A Division A project with an 11% return.
A Division A project with a 9% return.
A Division B project with an 11% return.
6. (TCO D) Butcher Timber Company hired your consulting firm to help them estimate the cost of
common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the
cost of common can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What
is an estimate of the firm's cost of common from retained earnings? (Points : 10)
12.60%
13.10%
13.63%
14.17%
14.74%
7. (TCO F) Warnock Inc. is considering a project that has the following cash flow and WACC data.
What is the project's NPV? Note that a project's expected NPV can be negative, in which case it will
be rejected.
WACC: 10.00%
Year 0 1 2 3
--------------------------------------------Cash flows -$950 $500 $400 $300 (Points : 10)
$54.62
$57.49
$60.52
$63.54
$66.72
8. (TCO F) Maxwell Feed & Seed is considering a project that has the following cash flow data. What
is the project's IRR? Note that a project's IRR can be less than the WACC (and even negative), in
which case it will be rejected.
Year 0 1 2 3 4 5
------------------------------------------------------------------------------------Cash flows -$9,500 $2,000 $2,025 $2,050 $2,075 $2,100 (Points : 10)
2.08%
2.31%
2.57%

2.82%
3.10%
9. (TCO F) Stern Associates is considering a project that has the following cash flow data. What is the
project's payback?
Year 0 1 2 3 4 5
-----------------------------------------------------------------------Cash flows -$1,100 $300 $310 $320 $330 $340 (Points : 10)
2.31 years
2.56 years
2.85 years
3.16 years
3.52 years
10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown below. The
equipment to be used would be depreciated by the straight-line method over its three-year life and
would have a zero salvage value, and no new working capital would be required. Revenues and other
operating costs are expected to be constant over the projects three-year life. However, this project
would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is
the projects NPV? (Hint: Cash flows are constant in years 1-3.)
WACC
10.0%
Pre-tax cash flow reduction for other products (cannibalization) - $5,000
Investment cost (depreciable basis)
$80,000
Straight-line deprec. rate
33.333%
Sales revenues, each year for three years
$67,500
Annual operating costs (excl. deprec.)
- $25,000
Tax rate
35.0%
a. $3,636
b. $3,828
c. $4,019
d. $4,220
e. $4,431