# IF 202 Foundations of Finance. Exercises3

```IF 202 Foundations of Finance
Kadir Has University, 2018/2019 Spring, Exercises #3
1. What is the net present value of a project that has an initial cash outflow of \$34,900 and the
following cash inflows? The required return is 15.35 percent.
2. An investment has the following cash flows and a required return of 13 percent. Based on IRR,
should this project be accepted? Why or why not?
?
3. Based on the profitability index rule, should a project with the following cash flows be accepted
if the discount rate is 14 percent? Why or why not?
4. A project has an initial cost of \$6,500. The cash inflows are \$900, \$2,200, \$3,600, and \$4,100
over the next four years, respectively. What is the payback period?
A. 1.73 years
B. 2.51 years
C. 2.94 years
D. 3.51 years
E. 3.94 years
5. A project has an initial cost of \$18,400 and produces cash inflows of \$7,200, \$8,900, and \$7,500
over three years, respectively. What is the discounted payback period if the required rate of return
is 16 percent?
A. 2.31 years
B. 2.45 years
C. 2.55 years
D. 2.62 years
E. never
6. The Square Box is considering two projects, both of which have an initial cost of \$35,000 and
total cash inflows of \$50,000. The cash inflows of project A are \$5,000, \$10,000, \$15,000, and
\$20,000 over the next four years, respectively. The cash inflows for project B are \$20,000,
\$15,000, \$10,000, and \$5,000 over the next four years, respectively. Which one of the following
statements is correct if The Square Box requires a 12 percent rate of return and has a required
discounted payback period of 3.5 years?
A. Both projects should be accepted.
B. Both projects should be rejected.
C. Project A should be accepted and project B should be rejected.
D. Project A should be rejected and project B should be accepted.
E. You should be indifferent to accepting either or both projects.
7. Miller Brothers Hardware paid an annual dividend of \$1.15 per share last month. Today, the
company announced that future dividends will be increasing by 2.6 percent annually. If you
require a 12 percent rate of return, how much are you willing to pay to purchase one share of this
stock today?
8.
Upper Crust Bakers just paid an annual dividend of \$2.80 a share and is expected to increase that
amount by 4 percent per year. If you are planning to buy 1,000 shares of this stock next year, how
much should you expect to pay per share if the market rate of return for this type of security is
11.50 percent at the time of your purchase?
9. The common stock of Textile Mills pays an annual dividend of \$1.65 a share. The company has
promised to maintain a constant dividend even though economic times are tough. How much are
you willing to pay for one share of this stock if you want to earn a 12 percent annual return?
10. The current dividend yield on Clayton's Metals common stock is 2.5 percent. The company just
paid a \$1.48 annual dividend and announced plans to pay \$1.54 next year. The dividend growth
rate is expected to remain constant at the current level. What is the required rate of return on this
stock?
11. Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last
annual dividend was \$2.10 a share. Dividends increase at a constant 2.6 percent per year. What is
the dividend yield?
12. Shares of Hot Donuts common stock are currently selling for \$32.35. The last annual dividend
paid was \$1.10 per share and the market rate of return is 10.7 percent. At what rate is the dividend
growing?
13. Dexter Metals, paid its first annual dividend yesterday in the amount of \$0.18 a share. The
company plans to double each annual dividend payment for the next 3 years. After that time, it
plans to pay \$1.25 a share for 2 years than then pay a constant dividend of \$1.60 per share
indefinitely. What is one share of this stock worth today if the market rate of return on similar
securities is 10.24 percent?
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