24.) Southeast Compositions, Inc. is considering a project with the following ca

Question

24.) Southeast Compositions, Inc. is considering a project with the following cash flows:

Initial Outlay = $126,000

Cash Flows: Year 1 = $44,000

Year 2 = $59,000

Year 3 = $64,000

Compute the net present value of this project if the company's discount rate is 14%.

Select one:

a. $1,193

b. $725,000

c. $239,209

d. -$1,193

23.) Sentry Manufacturing paid a dividend yesterday of $5 per share. The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of new common stock is

Select one:

a. 28.38%.

b. 31.40%.

c. 26.62%.

d. 24.12%.

Explanation / Answer

24) INITIAL OUTLAY=$1,26,000

NET PRESENT VALUE=PRESENT VALUE OF CASH INFLOWS-INITIAL OUTLAY

=$1,27,159-$1,26,000

=$1,159

23) DIVIDEND PAID YESTERDAY(D0)=$5

GROWTH RATE(g)=8%

DIVIDEND NEXT YEAR(D1)=$5+8%=$5.4

PRICE TODAY (P0)=$29

TAX=35%

FLOTATION COST(F)=$2.50

COST OF NEW COMMON STOCK=(D1/P0-F)+g

=($5.4/29-2.5)+0.08

=($5.4/26.5)+0.08

=28.38%

YEAR 1 2 3 CASH FLOWS($) 44,000 59,000 64,000 PV FACTOR @ 14% 0.877 0.769 0.675 PRESENT VALUE($) 38,588 45,371 43,200 TOTAL PRESENT VALUE OF CASH INFLOWS($) 1,27,159 INITIAL OUTLAY($) 1,26,000

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