Assignment:
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Project A
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Project B
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Initial Investment
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100,000
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100,000
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Year 1
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40,000
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10,000
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Year 2
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40,000
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10,000
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Year 3
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40,000
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75,000
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Year 4
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40,000
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85,000
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Problem 1. If the discount rate is 7%, which of the following is true:
a. The firm should accept only project A
b. The firm should accept only project B
c. The firm should accept both projects A and B
d. The firm should accept neither project A or B
Problem 2. If the discount rate is 10% and the projects are mutually exclusive, which of the following is true:
a. The firm should accept only project A
b. The firm should accept only project B
c. The firm should accept both projects A and B
d. The firm should accept neither project A or B
Problem 3. At what rate of interest is the present value of Project A equal to (within $100) the present value of Project B?
a. 20%
b. 0%
c. 15%
d. None of these.
Problem 4. If the discount rate is 25% and the projects are not mutually exclusive, which of the following is true:
a. The firm should accept only project A
b. The firm should accept only project B
c. The firm should accept both projects A and B
d. The firm should accept neither project.
Problem 5. What effect would depreciation have on the projects selection criteria:
a. Since the initial investment is equal for the two projects, Depreciation tax shields would add equally to both projects, ensuring no change in project acceptance criteria at all interest rates.
b. At lower interest rates, the effect of depreciation will tend to favor project A over project B.
c. If the projects are mutually exclusive, the computation of depreciation tax shields will have no effect on selection, regardless of the size of the initial investment.
d. None of these is true.
Use the following data to answer questions below:
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Dividend History and Forecast for FCF (Fluffy's Cat Farms)
Provided by: Sal's Dubious Stock Forecasts, Inc. (SDSI)
A Maryland Company
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Year
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2005
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2006
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2007 (forecast)
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2008 (forecast)
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Net Income
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10,000
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20,000
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30,000
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40,000
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Sales Revenue
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100,000
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200,000
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400,000
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500,000
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Dividend Payments per share
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$0.45
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$0.55
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$0.65
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$1.00
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ks (cost of equity)
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.43
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.48
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.45
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.41
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Problem 6. What is the compound growth rate, g for the firm FCF that should be used in the constant growth model based on the four year period given if Sal’s forecasts are accurate?
a. 41.42%
b. 22.09%
c. 49.53%
d. None of these are correct.
Problem 7. Given the compound growth rate implicit in the provided forecast, and assuming that the constant growth stock valuation formula is valid, what is a fair stock price for FCF as of the end of 2007?
a. $2.83
b. $2.92
c. $2.50
d. None of these.
Problem 8. If FCF has a maximum of 5000 shares outstanding, which of the following statements is most true regarding the rate of dividend payout?
a. Dividend payouts are too large to be sustainable --- the forecast is too high given the earnings per share implicit in the data.
b. The dividend payout forecasts are consistent with current year (2006) results, indicating a reasonable growth projection in income to shareholders.
c. Dividend payouts during the forecast period are too low, they will likely increase in the years to come without hurting the firms investment strategy.
d. None of these is true.
Problem 9. If the risk free rate in 2006 is estimated at 5 percent and the market risk premium is estimated as 10 percent, what is the beta of FCF in 2006?
a. 4.30
b. 4.8
c. 1.0
d. Insufficient data to compute solution is given