Question:
The T-bond rate is 6%; the market rate premium is 7%; CDH finances only with equity from retained earnings; and it uses the CAPM to estimate its cost of equity. Now CDH is considering two alternative trucks. Truck S has a cost of $12,000 and is expected to produce cash flows of $4,500 per year for 4 years. Truck L has a cost of $20,000 and is expected to produce cash flows of $7,500 per year for 4 years. By how much would CDH's value rise if it buys the better truck, and what is the MIRR of the better truck?
CDH Worldwide's stock returns versus the market were as follows, and the same relative volatility is expected in the future:
Year CDH Market
1999 12% 15%
2000 -6 -3
2001 25 19
2002 18 12