1) The earning, dividends, and stock price of Shelby Inc. are expected to grow at 7% our year in the future. Shelby’s common stock sells for $23 per share, its last dividend was $2.00 and the company will pay a dividend of $2.14 at the end of the current year.
a) Using the discounted cash flow approach, what is its cost of equity?
b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the expected return on the the market is 13%, then what would the firm’s cost of equity based on the CAPM approach?
c) If the firm’s bonds earn a return of 12%, then what would be your estimate of r, using the own-bond-yield-plus-judgmental-risk-premium approach? (HINT: Use the midpoint of the risk premium range)
d)On the basis of the results of Part a through c, what would be your estimate of Shelby’s cost of equity?
10-1: NPV) A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project’s NPV (HINT: Begin by constructing a time line.)
10-2: IRR) Refer to Problem 10-1. What is the project’s IRR?
10-3:MIRR) Refer to problem 10-1. What is the project’s MIRR?
10-4: Profitability Index) Refer to problem 10-1. What is the project’s PI
10-5: Payback) Refer to problem 10-1. What is the project’s payback period?
10-6: Discounted payback) Refer to problem 10-1. What is the project’s discounted payback period?
10-7: NPV) Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flow:
Year. Project A. Project B
1. $5,000,000 $20,000,000
2 10,000,000. 10,000,000
3. 20,000,000. 6,000,000
a) What are the two projects’ net present values, assuming the cost
of capital is 5%?
b) What are the two projects’ IRRs at these same cost of capital?
Chapter 25 Question, 25-1
Define the following terms, using graphs or equations to illustrate your answers wherever feasible:
a) Portfolio; feasible set; efficient portfolio; efficient frontier
b) Indifference curve; optimal portfolio
c) Capital Asset Pricing Model (CAPM); Capital Market Line (CML)
d) Characteristic line; beta coefficient, b
e) Arbitrage Pricing Theory (APT)
Chapter 25 – Problem 25-2
An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate of 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?
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