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Assignment Question(s): (Marks 5)

Q1: Alaman Corp. just paid a dividend of $2.15 yesterday. The company is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Alaman require a rate of return of 15 percent, what should be the market price of Alamans stock ? (1 mark)

Answer

Q2: Carrefour is expecting its new center to generate the following cash flows:

Years	0	1	2	3	4	5
Initial investment	($35,000,000)
Net operating cash flows		$6,000,000	$8,000,000	$16,000,000	$20,000,000	$30,000,000

a. What is the payback period for this new center. (1 mark)

b. Calculate the net present value using a cost of capital of 15 percent. Should the project be accepted? (1 mark)

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Q3: Alfa corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm's tax rate is 40%. (2 marks)

1. Calculate the WACC of the firm.
2. The firm is considering a project that is equally as risky as the firm's current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project?

Answer