Posted: April 24th, 2016
Shi Importers balance sheet shows $300 million in debt, $50 million in preferred
stock, and $250 million in total common equity. Shi faces a 40% tax rate and the
following data: rd _ 6%, rps _ 5.8%, and rs _ 12%. If Shi has a target capital structure
of 30% debt, 5% preferred stock, and 65% common stock, what is Shi s
Spencer Supplies stock is currently selling for $60 a share. The firm is expected to
earn $5.40 per share this year and to pay a year end dividend of $3.60.
a. If investors require a 9% return, what rate of growth must be expected for
b. If Spencer reinvests earnings in projects with average returns equal to thestock s expected rate of return, what will be next year s EPS? [Hint: g _ROE(Retention ratio).]
Cummings Products Company is considering two mutually exclusive investments.
The projects expected net cash flows are as follows:
Expected Net Cash Flows
Year Project A Project B
0 ($300) ($405)
1 (387) 134
2 (193) 134
3 (100) 134
4 600 134
5 600 134
6 850 134
7 (180) 0
a. Construct NPV profiles for Projects A and B.
b. What is each project s IRR?
c. If you were told that each project s cost of capital was 10%, which project
should be selected? If the cost of capital was 17%, what would be the proper
d. What is each project s MIRR at a cost of capital of 10%? At 17%? (Hint:
Consider Period 7 as the end of Project B s life.)
e. What is the crossover rate, and what is its significance?
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