Assignment
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?
Question 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)
Question 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?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.