A. Suppose a company has an outstanding preferred and common stock issue which has just paid a dividend of $2.00. Which stock do you think will have a higher price? Why?

B. Ron Joyce Corporation is experiencing rapid growth. Dividends are expected to grow at 20% per annum during the next three years, 15% the following year, and 10% indefinitely. The required return on the company's stock is 0.15, which currently sells for $50. What is the expected dividend in the coming year? 

C. If a project with conventional cash flows has a payback period less than the project's life, can you say with certainty whether the NPV of the project will be positive, negative or zero? Why or why not? If you know that the discounted payback period is less than the project's life, what can you say about the NPV? Explain. 

D. McMaster Energy and Burlington Hydro both recently reported earnings of $800,000. Both also have 500,000 shares outstanding and a discount rate of 0.15.

1. McMaster Energy has a new project will generate a net cash flow of $100,000 per annum in perpetuity. What is the company's current P/E ratio?
2. Burlington Hydro has a new project that will increase cash flows by $200,000 in the coming year. The earnings will grow at 10% per annum in perpetuity. What is the company's current P/E ratio? 

E. DeGroote Donuts has identified the following mutually exclusive projects: 

Year	Cash Flow (A)	Cash Flow (B)
0	-$11,000	-$11,000
1	4,000	1,000
2	5,000	6,000
3	6,000	5,000

 

1. What is the IRR for each project? Applying the IRR rule, which project should the company accept? Is this decision necessarily correct?
2. If the required return is 0.11, what is the NPV for each project? Applying the NPV rule, which project should the company accept?
3. Over what range of discount rates should the company choose Project A? Project B? At what discount rate would it be indifferent between the two projects? Explain. 

F. The Big Beaver Company is trying to choose between the following two mutually exclusive projects: 

Year	Cash Flow (A)	Cash Flow (B)
0	-$15,000	-$2,000
1	8,500	2,500
2	8,500	2,500
3	8,500	2,500

 

1. a. If the required return is 0.09, which project should be accepted according to the profitability index rule?
2. b. If the company applies the NPV rule, again with the required return equal to 0.09, which project should the company accept?
3. Explain why your answers to (a) and (b) are the same or different.

Answer rating: 100% (QA)

Here are my answers A The preferred stock will have a higher price because it is less risky Preferre... View the full answer