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

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    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%

    ---
    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%

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    https://brainmass.com/business/capital-budgeting/finance-evalulate-proposals-payback-npv-irr-optimal-capital-structure-dividends-221517

    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.

    Answer:

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

    ----------------------------------------------------------------------------------------------------------------------------------------------
    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

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