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?
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
(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.
Using the discounted cash flow approach, what is its cost of equity?
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. 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.)
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).
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?
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?
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
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?