Principles of Finance FIN101

Assignment Question(s):                                                        (Marks 5)

Q1: Alaman Corp. just paid a dividend of $2.15 yesterday. The company is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Alaman require a rate of return of 15 percent, what should be the market price of Alaman’s stock ? (1 mark)

Q2: Carrefour is expecting its new center to generate the following cash flows:

1. What is the payback period for this new center. (1 mark)

2. Calculate the net present value using a cost of capital of 15 percent. Should the project be accepted? (1 mark)

Answer

Q3: Alfa corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm’s tax rate is 40%. (2 marks)

1. Calculate the WACC of the firm.

2. The firm is considering a project that is equally as risky as the firm’s current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project?

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