Gb560 Unit 6 Essay

679 Words Jun 18th, 2013 3 Pages
Unit 5 Assignment
Charles Murphy
GB-540

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

Using the formula of ks = [pic] + g, you would take the cost dividend($2.14) divided by the stock share price of $23 and and that to the growth rate of 7% and the answer would be 16.3%.

b. If the firm’s beta is 1.6, the risk free rate is 9% and the expected return on the market is 13%, what will be the firm’s cost of equity using the CAPM approach?
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Payback period is 4 years and approx. 5 months.

E. Discounted payback period is is 6 years and 7 months. According to the table the 6th year is when

Things started to go in the positive. To figure the remainder of the time you would do the

following: 52125-49336.92 divided by 5428.52=.514 years times 12 months in a year

10-7

|year |A |B |5% |NPV-A |NPV-B |
|0 |(15,000,000) |(15,000,000) |1 |15,000,000 |(15,000,000) |
|1 |$5,000,000 |$20,000,000 |.9524 |$4,762,000 |$19,048,000 |
|2 |$10,000,000 |$10,000,000 |.907 |$9,070,000 |$9,070,000 |
|3 |$20,000,000 |$6,000,000 |.8638 |$17,276,000 |$5,182,800 |

NPV= $16,108,000 $18,300,800

|year |A |B |10% |NPV-A |NPV-B |
|0 |(15,000,000) |(15,000,000) |1 |15,000,000 |(15,000,000) |
|1 |$5,000,000

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