I need this by April 12, 2005 before MN.   Thanks

Which of the following is/are true?

I.  The dividend growth model only holds if, at some point in time,
the dividend growth rate exceeds the stock?s required return.
II.  A decrease in the dividend growth rate will increase a stock?s
market value, all else the same.
III.  An increase in the required return on a stock will decrease its
market value, all else the same.

a.	I only
b.	III only
c.	II and III only
d.	I and III only
e.	I, II, III


The cost of debt capital for a firm ____________.

a.	is the return that the firm?s creditors demand for new borrowings
b.	can be calculated by estimating the beta of the firm?s equity and
then using the SML
c.	can be estimated by finding the yield on recently issued bonds with
lower bond ratings
d.	can be calculated by looking at the coupon rates on existing bonds
of similar risk
e.	can be observed directly even if the firm?s bonds are not publicly traded


Mr. Goodlucky Corp. is considering investing in three mutually
exclusive projects.  Each project will require a $200,000 initial
investment and will provide cash flows as follows for a three-year
period:  (Each project will not last beyond three years)
		
	Project 1	Project 2	Project 3
Year 1	$100,000	$200,000	$300,000
Year 2	$200,000	$200,000	$200,000
Year 3	$300,000	$200,000	$100,000
		
		If Mr. Goodlucky Corp. considers the time value of money in
determining which project to invest in, which project represents the
best investment?
	A)	Project 1. 
	B)	Project 2. 
	C)	Project 3. 
	D)	All of them represent equally good investments.

1. b.

"The formula for the Dividend Growth Model is:
Value = (Current Dividend * (1 + Dividend Growth)) / (Required Return
- Dividend Growth)"

"The Dividend Growth Model" http://www.finplan.com/invest/divgrowmod.htm

Therefore, I. can't be true because that would make the value
negative.  II. can't be true because the value would decrease.  III.
is true because an increase in the required return decreases its
market value.

2.  a. "The cost of debt is generally easier to calculate

Equals the current interest cost to borrow new funds"

"The Cost of Capital" by D. B. Hamm (September 2004)
http://64.233.187.104/search?q=cache:lpcpfKkZg3IJ:web.ovc.edu/advance/hamm/fin15.ppt+SML+DEbt&hl=en


d. is almost correct, but the coupon rate is not the current market
rate.  "Most corporate debt is not actively traded, so its market
value cannot be observed directly.  But you can usually value a
nontraded debt security by looking to securities which are traded and
which have approximately the same default risk and maturity." 
"Principles of Corporate Finance" fourth edition by Brealey & Myers,
McGraw-Hill Inc. (1991) page 467.

3. c.  The time value of money means that "a dollar today is worth
more than a dollar tomorrow."  "Principles of Corporate Finance"
fourth edition by Brealey & Myers, McGraw-Hill Inc. (1991) page 12.
Therefore, since all three projects return the same total amount of
$600,000, the fact that project 3 returns more of that $600,000 sooner
makes it the best investment.