Question Details

What is the cost of equity from retained earnings based on the DCF approach 



1. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $1.30; P0 = $42.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach ?

a.	9.08% 

b.	9.56% 
c.	10.06% 
d.	10.56% 

e.	11.09% 

2. You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC that is used to evaluate them. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.

a.	If the two projects' NPV profiles do not cross in the upper right quadrant, then there will be a sharp conflict as to which one should be selected. 

b.	If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria. 

c.	If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria. 

d.	For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other. 

e.	For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other. 


3.  Aubey Inc. is considering two projects that have the following cash flows:

	Project 1	Project 2
Year	Cash Flow	Cash Flow
0	$2,000	$1,900
1	500	1,100
2	700	900
3	800	800
4	1,000	600
5	1,100	400

At what cost of capital would the two projects have the same net present value?
a.	4.73% 

b.	5.85% 

c.	6.70% 

d.	7.50% 

e.	8.20% 



Business Assignment Help, Business Homework help, Business Study Help, Business Course Help