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Question 1
Describe the role a company’s cost of capital plays in capital budgeting for both net present value (NPV) and internal rate of return (IRR) calculations. What are the rules for capital budgeting decisions that are made based on NPV and IRR. Explain how the dollar value of a project’s NPV relates to the overall value of the firm. The NPV profile graphs NPV values on the y-axis and discount rates on the x-axis. If Project X's profile crosses the x-axis at the 20% value, what does this tell us about the project?
Question 2
Define the cost of equity capital. Is it an accounting cost If not, what is it?Is it a low cost source of capital or a high cost source compared to other possible sources of capital? Explain.What would happen to a firm if it failed to deliver to its common stockholders the cost of equity capital?This question refers only to common equity.
Question 3
Assume each of the following functions is linear: fixed costs, variable costs, total costs, and total revenue.If you were to graph each of these against the number of units produced and sold (assume these two are equal) as depicted in your book and in class, describe the slopes of each of these four lines. What would we learn about a company’s upside and downside potential by studying these four lines on the graph described in this question? Explain.
You have been asked to perform a stock valuation prior to the annual shareholders meeting next week. The two models you’ve selected to value the firm are 1) the dividend discount model and 2) the discounted cash flow model.
The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 8% per year. Carpetto's common stock currently sells for $20.50 per share; its last dividend was $1.50; and it will pay a $1.62 dividend at the ..
Assume a project has normal cash flows (i.e., the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?
The Timber Ridge Company has the following relationships: Sales/Total assets = 3.55; ROA = 0.0930 What is Timber Ridge’s net profit margin?
The cost of preferred stock:
Essary Enterprises has bonds on the market making annual payments, with nine years to maturity, a par value of $1,000, and selling for $966. At this price, the bonds yield 6.8 percent. What must the coupon rate be on the bonds?
Assume that a new project will annually generate revenues of $1,900,000 and cash expenses (including both fixed and variable costs) $1,050,000, while increasing depreciation by $210,000 per year. In addition the firm’s tax rate is 36%. Calculate the ..
The alternative to investing in the new production line is to overhaul the existing line, which currently has both a book value and a salvage value of $0. It would cost $ 150,000 to overhaul the existing line, but this expenditure would extend its us..
You need $275,000 to start a business. A bank will loan you the money at 7.63% for 20 years with annual payments. About how much is the annual payment?
What are the principal shortcomings of Analyst 1's valuation approach in general, and in the way it is applied to AZJ?
What will be the amount of deposits at the end of each year if it is compounded at 12% semi-annually
Suppose your firm is evaluating four potential new investments. You calculate that theseprojects, Q, X, Y, and Z, have the NPV and IRR figures given below: Project Q: NPV = $1,000 IRR = 16%Project X: NPV = -$4,000 IRR = 12% Which project(s) should..
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