Problem (9-10)The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelbys 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 the current year. a. a. Using the discounted cash flow approach, what is its cost of equity? a. If the firms beta is 1.6, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firms cost of equity based on the CAPM approach? c. c. If the firms bonds earn a return of 12 %, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the midpoint of the risk premium range.) d. On the basis of the results of parts a through c, what would be your estimate of Shelbys cost of equity? Problem (10-1) a project has an initial cost of $40,000 expected net cash inflows of $90,00 per year for 7 years, and a cost of capital of 11%. What is the projects NPV? (hint: Begin by constructing a time line). (10-2) Refer to problem 10-1. What is the projects IRR? (10-3) Refer to problem 10-1. What is the projects MIRR? (10-4) Refer to problem 10-1. What is the projects PI? (10-5) Refer to problem 10-1. What is the projects payback period? (10-6) Refer to problem 10-1. What is the projects discounted payback period? (10-7) Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: Year.Project A. Project B 1 $5,000,000.. $20,000,000 2 $10,000,000 $10,000,000 3 $20,000,000 $6,000,000 a. What are the two projects net present values, assuming the cost of capital is 5%, 10%, and 15%? b. what are the two projects IRR at these same costs of capital?
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