Based on Baker's earnings history over the past 10 years across a variety of projects, which have covered various states of the economy, the venture capital execs want Baker to estimate their overall returns. Given the following estimates of economy over the next several years, determine Baker's expected rate of return. State of the Economy Current Probability of State of the EconomyRate of Return if State OccursBoom15%21.0%Normal50%13.0%Recession35%-18.0%
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- Based on Baker's earnings history over the past 10 years across a variety of projects, which have covered various states of the economy, the venture capital execs want Baker to estimate their overall returns. Given the following estimates of economy over the next several years, determine Baker's expected
rate of return.
State of the Economy Current Probability of State of the EconomyRate of Return if State OccursBoom15%21.0%Normal50%13.0%Recession35%-18.0%
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- A company projects a rate of return of 20% on new projects. Management plans to plow back 20% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 12% on stocks facing the same risks as the company.a) What is the sustainable growth rate?b) What is the stock price?c) What is the present value of growth opportunities (PVGO)?d) What is the P/E ratio?e) What would the price and P/E ratio be if the firm paid out all earnings as dividends?A company projects a rate of return of 20% on new projects. Management plans to plow back 20% of all earnings into the firm. Earnings this year will be $6 per share, and investors expect a rate of return of 12% on stocks facing the same risks as this company. What is the sustainable growth rate? What is the stock price? What is the present value of growth opportunities (PVGO)? What is the P/E ratio? What would the price and P/E ratio be if the firm paid out all earnings as dividends? Please show workings with formulas.The High-Flying Growth Company (HFGC) has been growing very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the last few years has been 20%, and HFGC managers believe that 20% is a reasonable figure for the firm’s cost of capital. To sustain a high growth rate, the HFGC CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm’s production capacity, and the second project involves introducing one of the firm’s existing products into a new market. Cash flows from each project appear in the following table. a. Calculate the NPV, IRR, and PI for both projects. b. Rank the projects based on their NPVs, IRRs, and PIs. c. Do the rankings in part b agree or not? If not, why not? d. The firm can only afford to undertake one of these investments, and the CEO favors the product introduction…
- The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 21%, and HFGC managers believe that 21% is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, HFGC's CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm's production capacity, and the second project involves introducing one of the firm's existing products into a new market. Cash flows from each project appear in the following table: a. Calculate the NPV for both projects. Rank the projects based on their NPVs. b. Calculate the IRR for both projects. Rank the projects based on their IRRs. c. Calculate the PI for both projects. Rank the projects based on their PIs. d. The firm can only afford to…The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 19%, and HFGC managers believe that 19% is a reasonable figure for the firm's cost of capital. To sustain a high growth rate, HFGC's CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the firm's production capacity, and the second project involves introducing one of the firm's products into a new market. Cash flows from each project appear in the following table: Year Plant expansion Product introduction 0 -3,500,000 -500,000 1 2,500,000 350,000 2 1,750,000 375,000 3 3,000,000 375,000 4 2,250,000…You are evaluating the potential purchase of a small business currently generating $ 42,500 of after-tax cashflow. On the basis of a review of similar risk investment opportunities, you must earn 15% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several assumptions about the growth rate of cash flows. What is the firm’s value if cash flows are expected to grow at an annual rate 12% for the first 2 years, followed by a constant rate of 9% from year 3 to infinity?
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- Anjelo Jonathan a financial analyst for Blues Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Anjelo’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment X had a market value of $20,000; investment Y had a market value of $55,000. During the year, investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current market values of investments X and Y are $21,000 and $55,000, respectively. A.) Calculate the expected rate of return on investments X using the most recent year’s data. (Format: 11.11%)B.) Calculate the expected rate of return on investments Y using the most recent year’s data. (Format: 11.11%)C.) Assuming that the two investments are equally risky, which one should Anjelo recommend? (Investment X or Investment Y)The HUT is evaluating a 5 year investment projected to yield the following relevant cash flows over its 5 year life: Given that the firm employs a 12% discount rate, what is the value of each of the three criteria: NPV? Profitability Index? Payback Period? round each to the nearest hundredth, as in "123.45".A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year’s dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm’s tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: Calculate the…