**1. Bouchard Company's stock sells for $20 per share, its last dividend
(D™) was $1.00, its growth rate is a constant 6 percent, and
the company would incur a flotation cost of 20 percent if it sold new common
stock. Retained earnings for the coming year are expected to be $1,000,000,
and the common equity ratio is 60 percent. If Bouchard has a capital budget
of $2,000,000, what component cost of common equity will be built into
the WACC for the last dollar of capital the company raises?**

**a. 11.30%**

**b. 11.45%**

**c. 11.80%**

**d. 12.15%**

**e. 12.63%**

**2. Allison Engines Corporation has established a target capital structure
of 40 percent debt and 60 percent common equity. The firm expects to earn
$600 in after-tax income during the coming year, and it will retain 40
percent of those earnings. The current market price of the firm's stock
is P™ = $28; its last dividend was D™ = $2.20, and
its expected dividend growth rate is 6 percent. Allison can issue new common
stock at a 15 percent flotation cost. What will Allison's marginal cost
of equity capital (not the WACC) be if it must fund a capital budget requiring
$600 in total new capital?**

**a. 15.8%**

**b. 13.9%**

**c. 7.9%**

**d. 14.3%**

**e. 9.7%**

**3. A company just paid a $2.00 a share dividend on its common stock
(D™ = $2.00). The dividend is expected to grow at a constant
rate of 7 percent per year. The stock currently sells for $42 a share.
If the company issues additional stock, it must pay its investment banker
a flotation cost of $1.00 per share. What is the cost of external equity
(that is, what is ke)?**

**a. 11.76%**

**b. 11.88%**

**c. 11.98%**

**d. 12.22%**

**e. 12.30%**

**4. Two projects being considered are mutually exclusive and have
the following projected cash flows:**

**Year Project A Project
B**

**0 -$50,000
-$50,000**

**1 15,625
0**

**2 15,625
0**

**3 15,625
0**

**4 15,625
0**

**5 15,625
99,500**

**If the required rate of return on these projects is 10 percent, which
would be chosen and why?**

**a. Project B because it has the higher NPV.**

**b. Project B because it has the higher IRR.**

**c. Project A because it has the higher NPV.**

**d. Project A because it has the higher IRR.**

**e. Neither, because both have IRRs less than the cost of capital.**

**5. Tapley Acquisition Inc. is considering the purchase of Target
Company. The acquisition would require an initial investment of $190,000,
but Tapley's after- tax net cash flows would increase by $30,000 per year
and remain at this new level forever. Assume a cost of capital of 15 percent.
Should Tapley buy Target?**

**a. Yes, because the IRR < the cost of capital.**

**b. Yes, because the NPV = $30,000.**

**c. Yes, because the NPV = $10,000.**

**d. No, because k > IRR.**

**e. No, because NPV < 0.**

**6. Green Grocers is deciding among two mutually exclusive projects.
The two projects have the following cash flows:**

**Project A Project B**

**Time Cash Flows Cash Flows**

**0 -$50,000 -$30,000**

**1 10,000 6,000**

**2 15,000 12,000**

**3 40,000 18,000**

**4 20,000 12,000**

**The company's cost of capital is 10 percent (WACC = 10%). What is
the net present value (NPV) of the project with the highest internal rate
of return (IRR)?**

**a. $ 7,090**

**b. $ 8,360**

**c. $11,450**

**d. $12,510**

**e. $15,200**

**7. The capital budgeting director of Sparrow Corporation is evaluating
a project which costs $200,000, is expected to last for 10 years and produce
after-tax cash flows, including depreciation, of $44,503 per year. If the
firm's cost of capital is 14 percent and its tax rate is 40 percent, what
is the project's IRR?**

**a. 8%**

**b. 14%**

**c. 18%**

**d. -5%**

**e. 12%**

**8. You are considering the purchase of an investment that would pay
you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000
per year for Years 9 and 10. If you require a 14 percent rate of return,
and the cash flows occur at the end of each year, then how much should
you be willing to pay for this investment?**

**a. $15,819.27**

**b. $21,937.26**

**c. $32,415.85**

**d. $38,000.00**

**e. $52,815.71**

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