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# Stone Inc.

8. Using the constant growth model, a firm's expected (D1) dividend yield is 3% of the stock price, and it's growth rate is 7%. If the tax rate is .35%, what is the firm's cost of equity?

a) 10%
b) 6.65%
c) 8.95 %

13. Assume a corporation has earnings before depreciation and taxes of \$100,000, depreciation of \$40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?

a) \$82,000
b) \$110,000
c) \$42,000
d) None of the above

15. You buy a new piece of equipment for \$5,535, and you receive a cash inflow of \$1,000 per year for 8 years. What is the internal rate of return?

a) less than 10%
b) between 10% and 11%
c) between 11% and 12%
d) more than 12%

16. Stone Inc. is evaluating a project with an initial cost of \$8,450. Cash inflows are expected to be \$1,000, \$1,000 and \$10,000 in the three years over which the project will produce cash flows. If the discount rate is 13%, what is the net present value of the project?

a) less than \$0
b) between \$0 and \$400
c) between \$400 and \$800
d) more than \$800

#### Solution Preview

8. Using the constant growth model, a firm's expected (D1) dividend yield is 3% of the stock price, and it's growth rate is 7%. If the tax rate is .35%, what is the firm's cost of equity?

a) 10%
b) 6.65%
c) 8.95 %

Cost of equity = dividend yield + growth rate = 3% + 7% = 10%

13. Assume a corporation has earnings before depreciation and taxes of \$100,000, depreciation of \$40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?

a) \$82,000
b) \$110,000
c) \$42,000
d) None of the above