6. An all-equity firm is considering the following projects. The T-bill rate (risk-free rate) is 3.5 percent, and the expected return on the market is 11 percent. Project W Beta 80 95 1.15 1.45 IR 9.4% 10.9% 13.0% 14.2% Y • Which projects have a higher expected return than the firm's 11 percent overall cost of capital? • Which projects should be accepted according to the risk (beta) of the project?
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- 8. Consider a project with the following cash flows: Co =-€100, C₁ =€200, C2 =-€75. a. How many internal rates of return does this project have? b. Which of the following numbers is the project IRR: (i) -50%; (ii) -12%; (iii) 5%; (iv) 50%? c. The opportunity cost of capital is 20%. Is this an attractive project?Matollows and 250 shillings in the following year. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is 10%, what price should investors pay for such shares today? 4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings and expected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the prices and costs increases at the same rate and that the required rate of return expressed in nominal terms is 14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. The inflation rate is expected to be 5%. (a)Outline two ways in which the effects that inflation has on the acceptability of investment projects could be considered. (b)Using the NPV technique, is the project worth taking? What have you learned from your analysis as far as treating inflation in investment analysis is concerned? 30/2021 4:39:41 PM Page 1 of 2You are a consultant to a large manufacturing corporation that is considering a project with the following net after-tax cash flows (in millions of dollars): Years from Now 0 1-10 After-Tax Cash Flow -85 19 The project's beta is 1.2. Required: a. Assuming that rf= 7% and E(TM) = 11%, what is the net present value of the project? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. b. What is the highest possible beta estimate for the project before its NPV becomes negative? Note: Round your answer to 2 decimal places. a. Net present value b. Highest beta
- 11:52 Investment Appraisal (Year 2 Column 2... 9% 5. Which of the following investments would you choose based on payback? Project 3 years 6 months 5 years 10 months C A В 2 years 8 months Project A Project B Project C 6. Discount Factor (5%) Year 0 -450,000 150,000 1.00 Year 1 0.952 Year 2 180,000 0.907 Year 3 250,000 0.864 Year 4 200,000 200,000 0.823 Year 5 0.784 ... Activity Chat Teams Assignments MoreNPV Calculate the net present value (NPV) for the following 12-year projects. on the acceptability of each. Assume that the firm has a cost of capital of 7%. a. Initial investment is $1,000,000; cash inflows are $ 160,000 per Year b. Initial investment is $2,500,000; cash inflows are $320,000 per Year Using Excel to answer. Show all FormulasA firm evaluates all of its projects by using the NPV decision rule. Cash Flow Year 0 -$ 26,000 1 19,000 2 3 12,000 8,000 a. At a required return of 30 percent, what is the NPV for this project? NPV b. At a required return of 37 percent, what is the NPV for this project? NPV
- Compute the (i) net present value and (ii) internal rate of return of the following Q2. capital budgeting projects. The firm's required rate of return is 15 percent. Based on the NPV which project should be ассеpted. [8] Projects Year X Y 50,000 45,000 1 10,000 12,000 2 30,000 10,000 3 25,000 14,000The Ajax Corporation has the following set of projects available to it: Project A B C с D E Note: All projects have equal risk. G▼ F Calculate the cumulative investment and complete Ajax's schedule of potential projects. (Hint: Ajax prioritizes projects according to their expected rates of return.) Project A B DY G E Investment Required Expected Rate of Return ($ Million) (%) 500 23.0 175 18.0 50 21.0 125 16.0 300 14.0 150 13.0 250 19.0 Investment Required Expected Rate of Return ($ Million) (%) 500 23.0 50 O $1,025 O $1,300 250 O $975 O $1,000 175 125 ▼ 300 150 ▼ 21.0 21.0 19.0 18.0 16.0 ▼ 14.0 13.0 ▼ Cumulative Funds Raised ($ Million) 250 Ajax can raise funds with the following marginal costs. Calculate the cumulative funds raised to complete the following table. Block of Funds Cost of Capital ($ Million) (%) First 250 14.0 Next 250 15.5 Next 100 16.0 Next 250 16.5 Next 200 18.0 Next 200 500 600 What is the optimal capital budget (in millions) for Ajax? 850 1,050 1,250 Cumulative…EXAMPLE 5-1 An investment of $10,000 can be made in a project that will produce a uniform annual revenue of $5,310 for 5 years and then have a salvage value of $2.000, Annual disbursements will be $3,000 each year for operation and maintenance costs. The company is willing to accept any project that will earn :0% or more, before income taxes, on all invested capital. Show whether this is a desirable investment by using the present worth method. Draw the cash flow diagram
- 6 The economic analysis of a project foresees annual investments equal to R$300,000,000.00, over three years of construction, followed by a very long period, which can be considered infinite, with an annual revenue of R$300,000,000.00 and annual operating costs (including taxes) of BRL 120,000,000.00. Obtain the net present value (NPV) of this project, in the year of the first investment, considering the minimum rate of attractiveness equal to 12% per year.Firms A and B are identical except for their capital structure. A carries no debt, whereas B carries £60m of debt on which it pays a 5% interest rate. Assume no transaction costs, no taxes and risk-free debt. The relevant numbers are provided in the following table (in £ m): A B Value of Firm 100 120 Debt 0 60 Equity 100 60 Projected earnings before interest 12 12 Interest payment 0 3 Interest rate Not Applicable 5% Please answer the following questions a) "The situation described in the table is consistent with the absence of arbitrage opportunities". True or False (T/F)? b) Which one of the two firms is relatively overvalued (A/B)? c) "B's shares carry more risk than A's shares". True or False (T/F)? d) What is the return to an investor holding a 10% stake in B (in £ '000)? e) Consider an investor who wants to purchase a 20% stake in A. If he wished to replicate B's capital structure through homemade leverage,…In September 2020, Facebook's stock price was about $250. A nine-month call on the stock, with an exercise price of $250, sold for $38. The risk-free interest rate was 2% a year. How much would you be willing to pay for a put on Facebook stock with the same maturity and exercise price? Assume that the Facebook options are European options. (Note: Facebook does not pay a dividend.) Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Value of put option