Chapter 9

(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.

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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 market is 13%, then what would be the firm’s cost of equity based on the CAPM approach?

(10-1) 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) 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:

a. What are the two projects’ net present values, assuming the cost of capital is 5%?10%? 15%?

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

(25-2) An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 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?

(5-2) Wilson Wonders’ bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

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