You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 100 1-10 15 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.34. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 14%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round Intermediate calculations. Enter your answer in

You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 100 1-10 15 On the basis of the behavior of the firm's stock, you believe that the beta of the firm is 1.34. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 14%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round Intermediate calculations. Enter your answer in

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 14P

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Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 – 100 1-10 + 16 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.50. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 13%, what is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places.) Net present value =
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 – 100 1-10 + 17 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.44. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 11%, what is the net present value of the project?
As a junior investment manager, your boss instructs you to help a client to invest $100,000 for the next year. Particularly, you are asked to form an investment portfolio for the client by investing in risk-free assets like 90-day bank bill and two stocks: A and B. Stock A has a beta value of 0.8, an expected return of 7% and a standard deviation of 10%; and stock B has a beta value of 1.2, an expected return of 12% and a standard deviation of 15%. The correlation coefficient between the returns for the two stocks is 0. The risk-free rate is 2%. (a) What is the expected return of the risky portfolio with the two stocks that has the least amount of risk? (b) Suppose that the optimal risky portfolio with the two stocks has a weight of 53% in A and 47% in B, and has the expected return of 9.4% and standard deviation of 8.8%. If this client is willing to take a risk measured by standard deviation of 5% for his overall investment portfolio, how much would you recommend to the client to…
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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 $2.14 at the end of thecurrent year.a. Using the discounted cash flow approach, what is its cost of equity?b. If the firm’s beta is 1.6, the risk-free rate is 9%, and the expected return on themarket is 13%, what will be the firm’s cost of equity using the CAPMapproach?c. If the firm’s bonds earn a return of 12%, what will rs be using the bond-yieldplus-risk-premium approach? (Hint: Use the midpoint of the risk premiumrange.)d. On the basis of the results of parts a through c, what would you estimateShelby’s cost of equity to be
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You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now After-Tax CF 0 −$ 26 1 to 10 $ 16 The project's beta is 1.5. Assuming rf = 6% and E(rM) = 12% Consider the following information: Portfolio Expected Return Beta Risk-free 6% 0 Market 11.4 1.0 A 9.4 2.0 Required: a. Calculate the return predicted by CAPM for a portfolio with a beta of 2.0. (Round your answer to 2 decimal places.) b. What is the alpha of portfolio A. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) c. If the simple CAPM is valid, is the situation above possible?
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