1 Consider a project with free cash flovvs in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project’s cost of capital is 20%. The risk-free interest rate is 10%. a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that is, what is the initial market value of the unlevered equity? c. Suppose the initial $100,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity. and vvhat is its initial value according to MM?
- Your company wants to raise $10 million by issuing 20-year zero-coupon bonds. lithe yield to maturity on the bonds will be 6% (annually compounded APR), what total principal amount of bonds must you issue? 10. The yield to maturity of a $1000 bond with a 7% coupon rate, semiannual coupons, and two years to maturity is 7.6% APR, compounded semiannually. What must its price be? 13. Summit Systems will pay a dividend of S1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the tirm’s equity cost of capital is 11%?
- You have been offered a unique investment opportunity. If you invest S10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it nove?
- The following table contains prices and dividends for a stock. All prices are after the dividend has been paid. If you bought the stock on January 1 and sold it on December 31, what is your realized return? Price Dividend Jan 1 10.00 Mar 31 11.00 0.20 Jun 30 10.50 0.20 Sep 30 11.10 0.20 Dec 31 11.00 0.20
- You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate additional free cash flow of $500 per month. What is the payback period? 28. You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table: 0 1 2 3 4 A -$50-$50 25 20 20 15 B -$100-$100 20 40 50 60 a. What are the IRRs of the two projects? b. If your discount rate is 5%, what are the NPVs of the two projects? c. Why do IRR and NPV rank the two projects differently?
- You buy 100 shares of Tidepool Co. for $40 each and 200 shares of Madtish, Inc., for $15 each. What are the weights in your portfolio? 34. ” You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5, and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next yea, should you buy it? Why or why not? 1. This year, FCF, Inc., has eamings before interest and taxes of $10 million, depreciation expenses of $1 million, capital expenditures of $1.5 million, and has increased its net working capital by $500,000. If its tax rate is 35%, what is its free