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# Finance questions

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1 (chapter 5) Co. A is about to pay a dividend of \$3.15 per share. Its future EPS and dividends are expected to grow with inflation, which is forecasted at 3% per year. What is the company's stock price? The nominal cost of capital is 10%. (Problem 17 page110)

2. (chapter 6) Calculate the IRR for the following project
C0 = -4,000
C1 = 5,000
C2= 6,000
C3= -3,000
(q 10 page 139)
3. (chapter 7) You are the treasurer of Co. A. The company has just ordered a piece of machinery for \$800,000. Of this sum, \$100,000 is described by the supplier an an installation cost. You do not know whether the IRS will permit the company to treat this cost as a tax-deductible current expense or as a capital investment. In the latter case, the company will depreciate the installation expense using the MACRS tax depreciation schedule. How will the IRS decision affect the after-tax cost of the machinery? The tax rate is 40% and the opportunity cost of capital is 10%.
(page 163 #13).
4. (chapter 8) Co A has a standard deviation of 42% per year and a beta of +.10. Co. B has a standard deviation of 31% a year and a beat of +.66. Which investment is safer for a diversified investor?
(page 202 #14)

#### Solution Preview

1 (chapter 5) Co. A is about to pay a dividend of \$3.15 per share. Its future EPS and dividends are expected to grow with inflation, which is forecasted at 3% per year. What is the company's stock price? The nominal cost of capital is 10%. (Problem 17 page110)
The stock price is the present value of all dividends. Since the growth rate is constant, we use the constant growth formula to calculate the stock price.
Stock Price = D1/(Ke-g)
Where D1 = expected dividend = 3.15
Ke = required return = 10% (the cost of capital)
g = growth rate = 3%
Stock Price = 3.15/(10%-3%) = \$45
2. (chapter 6) Calculate the IRR for the following project
C0 = -4,000
C1 = 5,000
C2= 6,000
C3= -3,000
IRR is the discounting rate that ...

#### Solution Summary

The solution explains some questions in finance.

\$2.19