## Description

**Discussion
1**

From a financial manager’s

perspective, discuss the capital-budgeting process used to identify projects

that add to the firm’s value? How do capital-budgeting decisions help to define

a firm’s strategic direction?

**Discussion
2**

When two mutually exclusive projects are

being compared, explain why the short-term project might be higher ranked under

the NPV criterion if the cost of capital is high; whereas, the long-term

project might be deemed better if the cost of capital is low. Would changes in

the cost of capital ever cause a change in the IRR ranking of two such

projects? Explain.

Assignment

-Unit 5

Problem

(9-10)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 the current year.

a.

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 the market is 13%, then what would be the

firm’s cost of equity based on the CAPM approach?

c.

c. If the firm’s 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 Shelby’s 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 project’s NPV? (hint: Begin by constructing

a time line).

(10-2)

Refer to problem 10-1. What is the projectâ€™s IRR?

(10-3) Refer to problem 10-1. What is

the projectâ€™s MIRR?

(10-4) Refer to problem 10-1. What is

the projectâ€™s PI?

(10-5)

Refer to problem 10-1. What is the projectâ€™s payback period?

(10-6) Refer to problem 10-1. What is

the projectâ€™s discounted payback period?

Discount Payback(DPB)

(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:

Yearâ€¦.Project Aâ€¦â€¦â€¦â€¦. Project

B

1â€¦â€¦… $5,000,000â€¦â€¦â€¦.. $20,000,000

2â€¦â€¦… $10,000,000â€¦â€¦… $10,000,000

3â€¦â€¦… $20,000,000â€¦â€¦… $6,000,000

a. What are the two projectsâ€™ net present values, assuming the cost of capital

is 5%, 10%, and 15%?

b. what are the two projectsâ€™ IRR at

these same costs of capital?

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