Problem (9-10)The earnings,
dividends, and stock price of Shelby Inc. are expected to grow at 7% per 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.
a. Using the discounted cash flow approach, what is its cost
of equity?
a.
If the firm’s beta is 1.6,
the risk-free rate is 9%, and the expected return on the market is 13%, then
what would be the firm’s cost of equity based on the CAPM approach?
c.
c. If the firm’s bonds earn a return of 12 %, then what would be your estimate
of rs using the over-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 parts a through c, what would be your estimate of
Shelby’s cost of equity?
Problem
(10-1) a project has an initial cost of $40,000 expected net cash inflows of
$90,00 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)
Refer to problem 10-1. What is the project’s IRR?
(10-3)
Refer to problem 10-1. What is the project’s MIRR?
(10-4)
Refer to problem 10-1. What is the project’s PI?
(10-5) Refer to problem 10-1. What is the
project’s payback period?
(10-6) Refer to problem 10-1. What is the
project’s discounted payback period?
(10-7)
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 flows:
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%, 10%, and 15%?
b.
what are the two projects’ IRR at these same costs of capital?
