27. You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.12. You have decided to sell a lead mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a steel company stock (b = 2.00). What is the new beta of the portfolio?
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b. 1.1725
c. 1.2311
d. 1.2927
e. 1.3573
____ 28. A stock just paid a dividend of D0 = $1.75. The required rate of return is rs = 12.0%, and the constant growth rate is g = 4.0%. What is the current stock price?
a. $20.56
b. $21.09
c. $21.63
d. $22.18
e. $22.75
____ 29. If D0 = $2.75, g (which is constant) = 3%, and P0 = $36, what is the stock’s expected total return for the coming year?
a. 9.82%
b. 10.07%
c. 10.33%
d. 10.60%
e. 10.87%
____ 30. Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?
a. $90.37
b. $92.69
c. $95.06
d. $97.50
e. $100.00
____ 31. Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = $1.30; P0 = $42.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?
a. 9.08%
b. 9.56%
c. 10.06%
d. 10.56%
e. 11.09%
____ 32. You are considering two mutually exclusive, equally risky, projects. Both have IRRs that exceed the WACC that is used to evaluate them. Which of the following statements is CORRECT? Assume that the projects have normal cash flows, with one outflow followed by a series of inflows.
a. If the two projects’ NPV profiles do not cross in the upper right quadrant, then there will be a sharp conflict as to which one should be selected.
b. If the cost of capital is greater than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
c. If the cost of capital is less than the crossover rate, then the IRR and the NPV criteria will not result in a conflict between the projects. One project will rank higher by both criteria.
d. For a conflict to exist between NPV and IRR, the initial investment cost of one project must exceed the cost of the other.
e. For a conflict to exist between NPV and IRR, one project must have an increasing stream of cash flows over time while the other has a decreasing stream. If both sets of cash flows are increasing or decreasing, then it would be impossible for a conflict to exist, even if one project is larger than the other.
____ 33. Aubey Inc. is considering two projects that have the following cash flows:
| Project 1 | Project 2 | |
| Year | Cash Flow | Cash Flow |
| 0 | $2,000 | $1,900 |
| 1 | 500 | 1,100 |
| 2 | 700 | 900 |
| 3 | 800 | 800 |
| 4 | 1,000 | 600 |
| 5 | 1,100 | 400 |
At what cost of capital would the two projects have the same net present value?
a. 4.73%
b. 5.85%
c. 6.70%
d. 7.50%
e. 8.20%
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