36) The Sisyphean Company\'s common stock is currently trading for $25.00 per sh

Question

36) The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to:


A) 8%

B) 2%

C) 4%

D) 6%



37) Which of the following statements is false?


A) About 75% of firms surveyed used the NPV rule for making investment decisions.

B) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

C) NPV is positive only for discount rates greater than the internal rate of return.

D) To decide whether to invest using the NPV rule, we need to know the cost of capital.

Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was able to write the book while simultaneously fulfilling her media commitments of appearing on TV news as a political commentator and give speeches.


38) Assume that once her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to:



A) $13.75 million

B) $12.20 million

C) $13.00 million

D) $3.75 million



39) Which of the following statements is false?


A) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital.

C) In general, the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision.

D) If the cost of capital estimate is more than the IRR, the NPV will be positive.

You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%.



40) The NPV for this project is closest to:



A) $139,500

B) $129,200

C) $29,200

D) $39,500



41) The IRR for this project is closest to:


A) 20.00%

B) 15.60%

C) 25.85%

D) 18.95%

Explanation / Answer

36) The Sisyphean Company's common stock is currently trading for $25.00 per share. The stock is expected to pay a $2.50 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 14%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to: We have P0=$25, d1=$2.50, Ks=14% find g We have P0=D1/(Ks-g) ie g = Ks - D1/P0 = 14%-2.50/25 = 4% C) 4% 37) Which of the following statements is false? C) NPV is positive only for discount rates greater than the internal rate of return. Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was able to write the book while simultaneously fulfilling her media commitments of appearing on TV news as a political commentator and give speeches. 38) Assume that once her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to: CF0 (Adv)=-$11M, CF from Speech etc =CFs=$8M & Cf1 from Book =$5M, CF2=(1-40%)*$5M = $3M, CF3=0.6*$3M = $1.8M & so on g = 40%, Kd=10% A) $13.75 million 39) Which of the following statements is false? D) If the cost of capital estimate is more than the IRR, the NPV will be positive. You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. 40) The NPV for this project is closest to: = -100000+500000/(1+20%)^7 = 39540.82 D) $39,500 41) The IRR for this project is closest to: A) 20.00%

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