Calculate the present value of a growing perpetuity with thefirst cash flow (occurring in one year) being $10 million and everysubsequent yearâs cash flow growing at a constant 6% rate (i.e, thecash flow at the end of two years is $10M(1.06) = $10.6 million,the cash flow at the end of three years is 10M(1.06)^2 = $11.236million, etc.). The cost of capital for this calculation is12%.
The firm has to spend $50 million immediately and $25 millionone year from now to start a new investment project. The firmâscost of capital is 12%. What is the present value of the firmâsexpenditures to start the new investment project?
The firm is considering the investment project in problem 2,where they invest $50 million immediately and $25 millionadditionally one year from now. There are no other cash inflows oroutflows for the project until the end of five years, at which timethe first cash inflow from the project is $10 million. After thisfirst cash inflow, the cash flows grow each year at 6%,indefinitely. The cost of capital for this project is 12%.Calculate the Net Present Value of this investment.
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The NPV of the investment in problem 3 depends on the growthrate in perpetuity of the cash inflows. For example, if the growthrate were 4% rather than six percent, the NPV of the project wouldbe lower. For what value of the growth rate is the NPV of theproject zero? (In other words, how high does the growth rate inperpetuity have to be for this project to be positive NPV?)
The following questions use the Capital Asset Pricing Model. Youhave the following market- wide parameters: the risk-free rate ofinterest in the economy is 3% and the risk premium on the marketportfolio (i.e., the market risk premium) is 6%.
What is the expected return on a stock with a beta of 1.5?
What is the expected return on a stock the return on which isuncorrelated with the return on the market portfolio?
What is the beta of a portfolio where half of the money in theportfolio is invested in the market index and half the money in theportfolio is invested in risk free securities? What is the expectedreturn on such a portfolio?
Calculate the present value of a growing perpetuity with thefirst cash flow (occurring in one year) being $10 million and everysubsequent yearâs cash flow growing at a constant 6% rate (i.e, thecash flow at the end of two years is $10M(1.06) = $10.6 million,the cash flow at the end of three years is 10M(1.06)^2 = $11.236million, etc.). The cost of capital for this calculation is12%.
The firm has to spend $50 million immediately and $25 millionone year from now to start a new investment project. The firmâscost of capital is 12%. What is the present value of the firmâsexpenditures to start the new investment project?
The firm is considering the investment project in problem 2,where they invest $50 million immediately and $25 millionadditionally one year from now. There are no other cash inflows oroutflows for the project until the end of five years, at which timethe first cash inflow from the project is $10 million. After thisfirst cash inflow, the cash flows grow each year at 6%,indefinitely. The cost of capital for this project is 12%.Calculate the Net Present Value of this investment.
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The NPV of the investment in problem 3 depends on the growthrate in perpetuity of the cash inflows. For example, if the growthrate were 4% rather than six percent, the NPV of the project wouldbe lower. For what value of the growth rate is the NPV of theproject zero? (In other words, how high does the growth rate inperpetuity have to be for this project to be positive NPV?)
The following questions use the Capital Asset Pricing Model. Youhave the following market- wide parameters: the risk-free rate ofinterest in the economy is 3% and the risk premium on the marketportfolio (i.e., the market risk premium) is 6%.
What is the expected return on a stock with a beta of 1.5?
What is the expected return on a stock the return on which isuncorrelated with the return on the market portfolio?
What is the beta of a portfolio where half of the money in theportfolio is invested in the market index and half the money in theportfolio is invested in risk free securities? What is the expectedreturn on such a portfolio?
Related questions
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.90 million, operating costs of $3.90 million, and a depreciation expense of $.90 million. Assume the tax rate is 30%.
| a. | Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) |
| Method | Cash Flow |
| Adjusted accounting profits | $ million |
| Cash inflow/cash outflow analysis | million |
| Depreciation tax shield approach | million |
| b. | Are the above answers equal? | |||
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2)
| Revenues generated by a new fad product are forecast as follows: |
| Year | Revenues |
| 1 | $50,000 |
| 2 | 40,000 |
| 3 | 20,000 |
| 4 | 10,000 |
| Thereafter | 0 |
| Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment. |
| a. | What is the initial investment in the product? Remember working capital. |
| Initial investment | $ |
| b. | If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) |
| Year | Cash Flow |
| 1 | $ |
| 2 | |
| 3 | |
| 4 | |
| c. | If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| NPV | $ |
| d. | What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| IRR | % |
rev: 09_24_2015_QC_CS-26391, 02_03_2015
