Author: Carol 96


Calculate the correct answer in all problems
USE NPV, Rate, and IRR Functions as appropriate in Problems 4b, 4d. 4e, 5, and 8
Explain in words what the answer means.
Please insert extra rows to hold your work as necessary.
For this problem set, we are not going to give you the exact answer but a range within which the correct answer can be found.  For example, if the problem was “How much is 20 plus 50?” we would say, “The correct answer is between 65 and 75” and you would need to specify the exact answer of “70.”

The corporate treasurer of Gonic Manufacturing Company expects the company to grow at 4% in the future.  She notes that debt will have an interest rate of 4% interest and the corporate tax rate is 35%.  She believes that debt will be a cheaper option to finance the growth. The current market price per share of its common stock is $19, and the expected dividend in one year is $0.75 per share.  Calculate the cost of the company's  retained earnings and check if the treasurer's assumption is correct. 

The risk-free rate on 30 year U.S. Treasury bonds is 2.75% and the expected rate of return on the overall stock market is 7%.  The BOW company has a beta of 1.4. What is the cost of equity? 

Les argues that the 10 year note is a better risk free rate at 2%.  He also argues that the stock market is too high and the expected return is really only 5%.  Assume that he is correct.  The company has a beta of 1.4. What is the cost of equity? 

A company, East  Berwick Enterprises, has a capital structure as follows:

East Berwick  is considering two projects for a new investment, but it can afford only one.  It has determined that the appropriate discount rate is 6.13%.  Please answer the following  questions based on the data below:

Calculate the payback period for each project. Do Not use the discounted payback method.
Calculate the net present value for each project.
Which project do you think will be approved, if only one project can be approved? Why?
What would the NPV be if the required rate of return was 10%?
What is the Internal rate of return?
Which is the best to use for deciding:  Payback, NPV or IRR?  Why?

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