A firm's average cost of capital is 8.5%, the risk free rate is 0.25%. You are...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A firm's average cost of capital is 8.5%, the risk free rate is 0.25%. You are tasked to evaluate 4 projects: A, B, C and D for budgeting purposes. The table below shows the cash flow of the projects: Firm's Cost of Capital 8.5% Risk Free Rate 0.25% B C D Project Beta 1.5 2 0.75 Year A B C D 0 (investment) $ (1,000) $ (1,000) $ (500) $ (500) 1 $ 300-$ 20 20 $ (400) $ (300) 2 $ 300 $ 300 $ 450 $ 69 3 $ 300 4 $ 300 5 $ 300 5 S 250 5 600 $ 400 400 $ 150 $ 200 S 500 $ 700 $ 500 1. Compute the cost of capital for individual projects. (3 pts.) 2. Compute the NPV for individual projects. Which projects would you accept based on NPV? (3 pts.) 3. Compute the IRR for individual projects. Which projects would you accept based on IRR? (3 pts.). 4. If the firm only has $1500 to invest in year 0, and any future investments will have to be funded out of income generated from chosen projects, which combination of projects would you recommend? Please explain your reason for the recommendation. (1 pts.) A firm's average cost of capital is 8.5%, the risk free rate is 0.25%. You are tasked to evaluate 4 projects: A, B, C and D for budgeting purposes. The table below shows the cash flow of the projects: Firm's Cost of Capital 8.5% Risk Free Rate 0.25% B C D Project Beta 1.5 2 0.75 Year A B C D 0 (investment) $ (1,000) $ (1,000) $ (500) $ (500) 1 $ 300-$ 20 20 $ (400) $ (300) 2 $ 300 $ 300 $ 450 $ 69 3 $ 300 4 $ 300 5 $ 300 5 S 250 5 600 $ 400 400 $ 150 $ 200 S 500 $ 700 $ 500 1. Compute the cost of capital for individual projects. (3 pts.) 2. Compute the NPV for individual projects. Which projects would you accept based on NPV? (3 pts.) 3. Compute the IRR for individual projects. Which projects would you accept based on IRR? (3 pts.). 4. If the firm only has $1500 to invest in year 0, and any future investments will have to be funded out of income generated from chosen projects, which combination of projects would you recommend? Please explain your reason for the recommendation. (1 pts.)
Expert Answer:
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
Students also viewed these finance questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Some rocks or bricks contain small air pockets in them and have a spongy structure. Assuming the air spaces form columns of an average diameter of 0.006 mm, determine how high water can rise in such...
-
Name at least four items withheld from employee payroll checks. Which deductions are required by law and which are voluntary?
-
Which of the following account balances would not be extended to the Cost of Goods Manufactured section of the worksheet? 1. Insurance on finished goods 2. Payroll taxes on outside sales salaries 3....
-
Find f0.05 for F8,18.
-
Jeff currently earns $3000 per month. He has an individual disability-income policy that will pay $2000 monthly if he is totally disabled. Disability is defined in terms of the worker's own...
-
In a competitive market, the demand is, QD = 476 - 1.2P. The supply of beef is Qs-142 +3.2P, if P > 142/3.2. Without any price controls, what is the equilibrium price? Without any price controls,...
-
The figure below shows the demand curve for a U.S. farmer for irrigating his land. It costs $100 per acre to irrigate the land. Each acre of land irrigation generates salty runoff that winds up in...
-
A plane has taken off the runway and has gained a speed of 300 mph making an angle 15 degrees with the horizontal. When the plane is 1600 ft off the ground, a loose nut detaches the plane and falls...
-
The CFO of your firm has asked you for an approximate answer to this question: What was the increase in real purchasing power associated with both 3-month Treasury bills and 30-year Treasury bonds?...
-
Converting a business idea into a profitable company is challenging. Finding and using a mentor is one approach entrepreneurs can take to increase the probability of being able to convert an idea...
-
Describe the kinds of evidence that need to be gathered to document the parties standard of living during the marriage when significant assets are involved.
-
Identify the general rule governing modifications of alimony awards.
-
Currently, you have RM60,000 (Malaysian ringgit) that you would like to invest for 2 years and are considering buying a Malaysian government security maturing in 1 year that pays 4 percent annually....
-
Suppose you are a service provider with 180KHz of bandwidth which you must allocate between voice and data users. The voice users require 20Khz of bandwidth, and the data users require 60KHz of...
-
A summary of changes in Pen Corporation's Investment in Sam account from January 1, 2011, to December 31, 2013, follows (in thousands): ADDITIONAL INFORMATION 1. Pen acquired its 80 percent interest...
-
Laurel, Inc., has debt outstanding with a coupon rate of 6% and a yield to maturity of 7%. Its tax rate is 35%. What is Laurels effective (after-tax) cost of debt?
-
You have a depreciation expense of $500,000 and a tax rate of 21%. What is your depreciation tax shield?
-
Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.75. What is its expected...
-
In the water pump of Problem 10.8, the pump casing acts as a diffuser, which converts 60 percent of the absolute velocity head at the impeller outlet to static pressure rise. The head loss through...
-
A centrifugal pump impeller having \(r_{1}=50 \mathrm{~mm}\), \(r_{2}=150 \mathrm{~mm}\), and width \(b=3.75 \mathrm{~mm}\) is to pump \(225 \mathrm{~L} / \mathrm{s}\) of water and supply \(12.2...
-
An axial-flow fan operates in sea-level air at \(1350 \mathrm{rpm}\) and has a blade tip diameter of \(3 \mathrm{ft}\) and a root diameter of \(2.5 \mathrm{ft}\). The inlet angles are...
Electron Paramagnetic Resonance Spectroscopy Applications 1st Edition - ISBN: 3030396703 - Free Book
Study smarter with the SolutionInn App