The earnings, dividends, and stock price of Shelby Inc.

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?

a. 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 project’s IRR?

(10-3) Refer to problem 10-1. What is the project’s MIRR?

(10-4) Refer to problem 10-1. What is the project’s PI?

(10-5) Refer to problem 10-1. What is the project’s payback period?

(10-6) Refer to problem 10-1. What is the project’s 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?