Rose has preferred stock selling for 99 percent of par that pays a 9 percent ann
ID: 2745284 • Letter: R
Question
Rose has preferred stock selling for 99 percent of par that pays a 9 percent annual coupon. What would be Rose's component cost of preferred stock? 4.55% 8.91% 9.00% 9.09% When calculating the weighted average cost of capital, weights based on book values. book weights. market values. market betas. Use the PI decision rule to evaluate these projects; which one(s) should be accepted or rejected? accept both A and 6 accept neither A nor B accept A, reject 8 reject A, accept B Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown bellow. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively. Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business one could find other firms engaged in the proposed new line of business and use their betas as proxies to estimate the project's risk. one would like to find at least three or four pure-play proxies. two, or even one, proxies might represent a suitable sample if their line of business resembles the proposed new project closely enough. All the answers make this a true statement.Explanation / Answer
Question19
Kp = D/P0 = 9/99 x 100 = 9.09 %
P0 = Current price = 99
Dividend = 9
KP = Cost of preferred stock=?
Answer: option 4) 9.09 %
Question 20
When calculating the weighted average cost of capital, weights are based on
Market Values.
Answer: option 3) Market Values.
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Question 21
Project A:
Discounted Payback Period
Year
Cash Flow
PV Factor@ 8%
PV Cash Flow
Cum PV Cash Flow
0
(20,000)
1
(20,000)
(20,000)
1
10,000
0.9259
9,259
(10,741)
2
30,000
0.8573
25,720
14,979
3
1,000
0.7938
794
15,773
Discounted Payback period= 1+10,741/25,720
=1+ 0.417612753= 1.4Years
Project B
Discounted Payback Period
Year
Cash Flow
PV Factor@ 8%
PV Cash Flow
Cum PV Cash Flow
0
(30,000)
1
(30,000)
(30,000)
1
10,000
0.9259
9,259
(20,741)
2
20,000
0.8573
17,147
(3,594)
3
50,000
0.7938
39,692
36,098
Discounted Payback period= 2+3,594/39,692
=2+ 0.09= 2.09 Years
Answer: option 1) Accept both A & B
Question 22
Which of the following makes this a true statement? Ideally, when searching for a beta for a new line of business
Answer: option 4) All the answers make this a true statement.
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Discounted Payback Period
Year
Cash Flow
PV Factor@ 8%
PV Cash Flow
Cum PV Cash Flow
0
(20,000)
1
(20,000)
(20,000)
1
10,000
0.9259
9,259
(10,741)
2
30,000
0.8573
25,720
14,979
3
1,000
0.7938
794
15,773
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