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Homework answers / question archive / 1) Taylor Q's common stock is currently selling for $39
1) Taylor Q's common stock is currently selling for $39.45. It just paid a dividend of $2.15 and dividends are expected to grow at a rate of 5.15% indefinitely. What is the expected rate of return on Taylor Q's stock?
2) Assume that you are the CFO at Porter Memorial Hospital. The CEO has asked you to analyze two proposed capital investments: Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12 percent. The project's expected net cash flows are as follows:
Year Project X Project Y
0 -$10,000 -$10,000
1 $6,500 $3,000
2 $3,000 $3,000
3 $3,000 $3,000
4 $1,000 $3,000 a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). b. Which project (or projects) is financially acceptable? Explain your answer.
1) Computation of the expected rate of return (rcs):-
Expected rate of return (rcs) = (D1 / P0) + g
= ($2.15*(1+5.15%)/$39.45) + 5.15%
= ($2.26 / $39.45) + 5.15%
= 5.73% + 5.15%
= 10.88%
2-a) Payback period for project A = 2.17 years
For project B = 3.33 years
NPV for project A = $966.01
For project B = -$887.95
IRR for project A = 18.03%
For project B = 7.71%
b). The project A should be accepted because the NPV and IRR for project A is higher than the project B. And the payback period for project A is lower than the project B. So, the project A should be accepted.
