Net Present Value and WACC questions In Tutorial Library

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TITLE: Net Present Value and WACC questions

CLASS / COURSE: Finance

QUESTION DESCRIPTION:

Please see attachment for questions.

15. Question : Supernormal Growth Rizzi Co. is growing quickly. Dividends are expected to grow at a 22 percent rate for 3e next 3 years, years with the growth rate falling off to a constant 7 percent thereafter.
Required: If the required return is 11 percent and the company just paid a $2.80 dividend. what is the current share price?
 
2. Question : Consider the following two mutually exclusive projects:
Year
Cash Flow
(A)
Cash Flow
(B)
0 –$ 350,000 –$ 35,000
1 25,000 17,000
2 70,000 11,000
3 70,000 17,000
4 430,000 11,000
The required return is 15%. Managers require a payback of 4 years.
Fill in the following table:
Criteria Project A Project B Accept A, B or
Neither
Payback Period
Discounted
Payback
NPV
IRR
Profitability
Index
Student
Answer:
3. Question :
Calculating the WACC
Filer Manufacturing has 8.5 million shares of common stock outstanding. The current share price
is $56, and the book value per share is $5. Filer Manufacturing also has two bond issues
outstanding. The first bond issue has a face value of $60 million, has a 6 percent coupon, and
sells for 91 percent of par. The second issue has a face value of $48.45 million, has a 5.3 percent
coupon, and sells for 94.8 percent of par. The first issue matures in 10 years, the second in 7
years.
The most recent dividend was $3.70 and the dividend growth rate is 3.3 percent. Assume the
overall cost of debt is the weighted average of that implied by the two outstanding debt issues.
Both bonds make semiannual payments. The tax rate is 34 percent.
Item
Market Value Weight of Debt
Market Value Weight of Equity
Cost of debt, after tax
Cost of equity
WACC

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SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Corporate Finance
4. Investment and Portfolio Management

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