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# Finance: Evalulate Proposals, Payback, NPV, IRR, Optimal Capital

A firm is evaluating a proposal which has an initial investment of \$35,000 and has cash flows of \$10,000 in year 1, \$20,000 in year 2, and \$10,000 in year 3. The payback period of the project is

A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.

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From the information below, select the optimal capital structure for Minnow Entertainment Company.

a) Debt = 40%; Equity = 60%; EPS = \$2.95; Stock price = \$26.50.

b) Debt = 50%; Equity = 50%; EPS = \$3.05; Stock price = \$28.90.

c) Debt = 60%; Equity = 40%; EPS = \$3.18; Stock price = \$31.20.

d) Debt = 80%; Equity = 20%; EPS = \$3.42; Stock price = \$30.40.

e) Debt = 70%; Equity = 30%; EPS = \$3.31; Stock price = \$30.00.

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Chandler Communications'CFO has provided the following information:
The company's capital budget is expected to be \$5,000,000.
The company's target capital structure is 70 percent debt and 30 percent equity.
The company's net income is \$4,500,000.
If the company follows a residual dividend policy, what portion of its net income should it pay out as dividends this year?

A) 33.33%

B) 40.00%

C) 50.00%

D) 60.00%

E) 66.67%

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Redwood Systems follows a strict residual dividend policy. The company estimates that its capital expenditures this year will be \$40 million, its net income will be \$30 million, and its target capital structure is 60 percent equity and 40 percent debt. What will be the company's dividend payout ratio?

A) 80%

B) 60%

C) 40%

D) 20%

E) 15%

#### Solution Preview

A firm is evaluating a proposal which has an initial investment of \$35,000 and has cash flows of \$10,000 in year 1, \$20,000 in year 2, and \$10,000 in year 3. The payback period of the project is

A) 1 year.
B) 2 years.
C) between 1 and 2 years.
D) between 2 and 3 years.

D) between 2 and 3 years.
Assuming uniform accrual of cash flows in Year 3, the payback period is 2.5 years.

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From the information below, select the optimal capital structure for Minnow Entertainment Company.

a) Debt = 40%; Equity = 60%; EPS = \$2.95; Stock ...

#### Solution Summary

This solution identifies the correct answer and provides brief justifications on the topics of proposals, payback, NPV, IRR, optimal capital structure and other capital budgeting topics.

\$2.19