Sentry Manufacturing paid a dividend yesterday of $5 per share (note: D 0 = $5).

Question

Sentry Manufacturing paid a dividend yesterday of $5 per share (note: D0 = $5). 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

a. 28.38%.

b. 26.62%.

c. 31.40%.

d. 24.12%.

The internal rate of return is

a. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.

b. the discount rate that makes the NPV positive.

c. the rate of return that makes the NPV positive.

d. the discount rate that makes NPV negative and the PI greater than one.

The net present value method

a. uses all of a project's cash flows.

b. is consistent with the goal of shareholder wealth maximization.

c. all of the above.

d. recognizes the time value of money.

Explanation / Answer

The internal rate of return is a. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows. At internal Rate of Return the Net Present Value is Zero NPV = Cash Inflows- Cash Outflows The net present value method C. All of the above NPV = Cash Inflows- Cash Outflows

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