Your company is considering two potential new investments: Project B and Project C. Each is a four-year project. The forecast cash flows for each project are shown below. The projects are independent. You have analyzed the systematic risk of each project. Your analysis has determined that the beta for Project B is 0.55, and the beta for Project C is 1.75. The risk-free rate is 5.5% and the market risk premium is 6%. Which project or projects should be accepted?
A. Accept Project B. Reject Project C.
B. Accept Project C. Reject Project B.
C. Accept both projects.
D. Reject both projects.
Your company is considering two potential new investments: Project B and Project C. Each is a four-year project. The forecast cash flows for each project are shown below. The projects are independent. You have analyzed the systematic risk of each project. Your analysis has determined that the beta for Project B is 0.55, and the beta for Project C is 1.75. The risk-free rate is 5.5% and the market risk premium is 6%. Which project or projects should be accepted?
A. Accept Project B. Reject Project C.
B. Accept Project C. Reject Project B.
C. Accept both projects.
D. Reject both projects.
Related questions
1.
CAPM Required Return A company has a beta of.64. If the market return is expected to be 13.4 percent and therisk-free rate is 5.70 percent, what is the company's requiredreturn?
8.58%
16.33%
14.28%
10.63%
2.
P/E Ratio and Stock Price InternationalBusiness Machines (IBM) has earnings per share of $7.65 and a P/Eratio of 15.35. What is the stock price?
$46.00
$2.01
$117.43
$.50
3.
Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 10 percent, and that the maximumallowable payback and discounted payback statistic for the projectare 2 and 3 years, respectively.
| Time | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| CashFlow | -900 | 190 | 450 | 650 | 650 | 250 | 650 |
Use the PI decision rule to evaluate this project; should it beaccepted or rejected?
1.22%, accept
1.22%, reject
-122.00%, reject
122.12%, accept
4.
Compute the Payback statistic for Project X and recommendwhether the firm should accept or reject the project with the cashflows shown below if the appropriate cost of capital is 12 percentand the maximum allowable payback is 4 years.
| Time: | 0 | 1 | 2 | 3 | 4 | 5 |
| Cashflow: | -3,100 | 950 | 700 | 850 | 725 | 625 |
rev: 12_06_2012
3.83 years, Accept
2.83 years, Accept
3.83 years, Reject
2.83 years, Reject
5.
Portfolio Beta You own $22,500 of City Steelstock that has a beta of 3.33. You also own $39,000 of Rent-N-Co(beta = 1.78) and $20,800 of Lincoln Corporation (beta = -.82).What is the beta of your portfolio?
4.86
1.55
4.29
1.00
6.
Portfolio Return At the beginning of the month,you owned $10,100 of Company G, $10,200 of Company S, and $15,400of Company N. The monthly returns for Company G, Company S, andCompany N were 9.4 percent, -1.27 percent, and 9.3 percent. What isyour portfolio return? (Round intermediate calculations to 2decimal places.)
17.45%
6.66%
5.82%
6.26%
7.
Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 10 percent, and that the maximumallowable payback and discounted payback statistic for the projectare 2 and 3 years, respectively.
| Time | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| CashFlow | -1,070 | 100 | 500 | 700 | 700 | 300 | 700 |
Use the discounted payback decision rule to evaluate this project;should it be accepted or rejected?
3.08 years, reject
2.83 years, accept
2.92 years, accept
3.09 years, reject
8.
Portfolio Weights If you own 330 shares of AirLine Inc at $19.65, 260 shares of BuyRite at $10.6, and 440 sharesof Motor City at $46.65, what are the portfolio weights of eachstock?
Air Line = .2178, BuyRite = .0926, MotorCity = .6896
Air Line = .3333, BuyRite = .3333, MotorCity = .3333
Air Line = .3300, BuyRite = .2600, MotorCity = .4400
Air Line = .3204, BuyRite = .2524, MotorCity = .4272
9.
Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 12 percent, and that the maximumallowable payback and discounted payback statistic for the projectare 2 and 3 years, respectively.
| Time | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| CashFlow | -1,150 | 30 | 570 | 770 | 770 | 370 | 770 |
Use the NPV decision rule to evaluate this project; should it beaccepted or rejected?
$2,118.66, accept
$864.87, accept
$-495.13, reject
$968.66, accept
10.
JackITs has 5.6 million shares of common stock outstanding, 1.6million shares of preferred stock outstanding, and 26.00 thousandbonds. If the common shares are selling for $28.60 per share, thepreferred share are selling for $14.10 per share, and the bonds areselling for 97.94 percent of par, what would be the weight used forequity in the computation of JackIT's WACC?
77.50%
33.33%
76.93%
66.67%
| 1. Understand how to use EXCEL Spreadsheet | |||||||
| (a) Develop proforma Income Statement Using ExcelSpreadsheet | |||||||
| (b) Compute Net Project Cashflows,NPV, and IRR | |||||||
| (c) Developproblem-solving and critical thinking skills | |||||||
| and make long-term investment decisions | |||||||
| 1) LifePeriod of the Equipment = 4 years | 8) Sales for first year (1) | $200,000 | |||||
| 2) Newequipment cost | $(200,000) | 9) Sales increase per year | 5% | ||||
| 3)Equipment ship & install cost | $(35,000) | 10) Operating cost (60% of Sales) | $(120,000) | ||||
| 4) Relatedstart up cost | $(5,000) | (as a percent of sales in Year 1) | -60% | ||||
| 5)Inventory increase | $25,000 | 11) Depreciation (Straight Line)/YR | $(60,000) | ||||
| 6) AccountsPayable increase | $5,000 | 12) Marginal Corporate Tax Rate (T) | 21% | ||||
| 7) Equip.salvage value before tax | $15,000 | 13) Cost of Capital (Discount Rate) | 10% | ||||
| ESTIMATING Initial Outlay (Cash Flow, CFo, T= 0) | |||||||
| CF0 | CF1 | CF2 | CF3 | CF4 | |||
| Year | 0 | 1 | 2 | 3 | 4 | ||
| Investments: | |||||||
| 1)Equipment cost | |||||||
| 2) Shippingand Install cost | |||||||
| 3) Start upexpenses | |||||||
| Total Basis Cost (1+2+3) | |||||||
| 4) Net Working Capital | |||||||
| Total Initial Outlay | |||||||
| Operations: | |||||||
| Revenue | |||||||
| OperatingCost | |||||||
| Depreciation | |||||||
| EBIT | |||||||
| Taxes | |||||||
| Net Income | |||||||
| Addback Depreciation | |||||||
| Total Operating Cash Flow | XXXXX | XXXXX | XXXXX | XXXXX | |||
| Terminal: | |||||||
| 1) Changein net WC | $- | $- | $- | $20,000 | |||
| 2) Salvagevalue (after tax) | Salvage Value Before Tax (1-T) | XXXXX | |||||
| Total | XXXXX | ||||||
| Project Net Cash Flows | $- | $- | $- | $- | $ | ||
| NPV = | IRR = | Payback= | |||||
| Q#1 | Would you accept the project based on NPV, IRR? | ||||||
| Would you accept the project based on Payback rule if projectcut-off | |||||||
| is 3years? | |||||||
| Q#2 Impact of 2017 Tax Cut Acton Net Income, Cash Flows and | |||||||
| Capital Budgeting (Investment ) Decisions | |||||||
| (a) | Estimate NPV, IRR and Payback Period of the project if equipment isfully | ||||||
| depreciated in first year and tax rate equalsto 21%. Would you | |||||||
| accept or reject the project? | |||||||
| (b) | As a CFO of the firm, which of the above two scenario(a) or (b) | ||||||
| would you choose? Why? | |||||||
| Q#3 How would you explain to your CEOwhat NPV means? | |||||||
| Q#4 What are advantages anddisadvantages of using only Payback method? | |||||||
| Q#5 What are advantages and disadvantages of usingNPV versus IRR? | |||||||
| Q#6 Explain the difference between independent projectsand mutually exclusive projects. | |||||||
| When you are confronted with Mutually Exclusive Projects and havecoflicts | |||||||
| with NPV and IRR results, which criterion would you use (NPV orIRR) and why? *****SHOW WORK PLEASE !!!! | |||||||
