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Unit 5: Chapter 9 and 10 Problems

9-10. The earnings, dividends, and stock price of Shelby Inc. are expected to grow 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 year.

a. Using the discounted cash flow approach, what is the cost of equity?

b. If the firm’s beta is 1.6, the risk-free is 9%, and the expected return on the market is 13%, then what would be the firm’s 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 over-own-bond-yield-plus-judgmental-risk-premium approach?

d. On the basis of the results of parts a through c, what would be your estimate of Shelby’s cost of equity?

10-1. A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is the project’s NPV?

10-2. What is the project’s IRR

10-3. What is the project’s MIRR?

10-4. What is the project’s PI?

10-5. What is the project’s payback period?

10-6. What is the project’s discounted payback period?

10-7. Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. Your estimate that the investment 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. a. What are the two projects’ net present values, assuming the cost of capital is 5%? 10%? 15%?

b. b. What are the two projects’ IRR at these same costs of capital?

Subject | Business |

Due By (Pacific Time) | 09/03/2013 05:00 pm |

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