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Algunos Ejercicios PDF
Algunos Ejercicios PDF
Ch 5
8 Payback Consider the following projects:
.
a. If the opportunity cost of capital is 10%, which projects have a positive NPV?
b. Calculate the payback period for each project.
c. Which project(s) would a firm using the payback rule accept if the cutoff period
were three years?
d. Calculate the discounted payback period for each project.
e. Which project(s) would a firm using the discounted payback rule accept if the
cutoff period were three years?
$1000
A8) 8. a. NPVA $1000 $90.91
(1.10)
$1000 $1000 $4000 $1000 $1000
NPVB $2000 $4,044.73
(1.10) (1.10) 2 (1.10) 3 (1.10) 4 (1.10)5
c. A and B
$1000
d. PVA $909.09
(1.10)1
The present value of the cash inflows for Project A never recovers the initial
outlay for the project, which is always the case for a negative NPV project.
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The present values of the cash inflows for Project B are shown in the third
row of the table below, and the cumulative net present values are shown in
the fourth row:
C0 C1 C2 C3 C4 C5
-2,000.00 +1,000.00 +1,000.00 +4,000.00 +1,000.00 +1,000.00
-2,000.00 909.09 826.45 3,005.26 683.01 620.92
-1,090.91 -264.46 2,740.80 3,423.81 4,044.73
Since the cumulative NPV turns positive between year 2 and year 3, the
discounted payback period is:
264.46
2 2.09 years
3,005.26
The present values of the cash inflows for Project C are shown in the third row of the table
below, and the cumulative net present values are shown in the fourth row:
C0 C1 C2 C3 C4 C5
-3,000.00 +1,000.00 +1,000.00 0.00 +1,000.00 +1,000.00
-3,000.00 909.09 826.45 0.00 683.01 620.92
-2,090.91 -1,264.46 -1,264.46 -581.45 39.47
Since the cumulative NPV turns positive between year 4 and year 5, the
discounted payback period is:
581.45
4 4.94 years
620.92
e. Using the discounted payback period rule with a cutoff of three years, the
firm would accept only Project B.
Q12 IRR rule Mr. Cyrus Clops, the president of Giant Enterprises, has to make a choice
between two possible investments:
The opportunity cost of capital is 9%. Mr. Clops is tempted to take B, which has the higher
IRR.
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12. a. Because Project A requires a larger capital outlay, it is possible
that Project A has both a lower IRR and a higher NPV than Project B. (In fact,
NPVA is greater than NPVB for all discount rates less than 10%.) Because the
goal is to maximize shareholder wealth, NPV is the correct criterion.
d. To use the IRR criterion for mutually exclusive projects, calculate the IRR
for the incremental cash flows:
C0 C1 C2 IRR
A-B 200 +110 +121 10%
Because the IRR for the incremental cash flows exceeds the cost of capital,
the additional investment in A is worthwhile.
250 300
c. NPVA 400 $ 81.86
1.09 (1.09) 2
140 179
NPVB 200 $79.10
1.09 (1.09) 2
Calculate IRRs for A and B. Which project does the IRR rule suggest is best? Which
project is really best? (LO8-3)
Answer:
1. IRRA = discount rate (r), which is the solution to the following equation:
1 1
$21,000 $30,000 r = IRRA = 25.69%
r r (1 r )2
IRRB = discount rate (r), which is the solution to the following equation:
1 1
$33,000 $50,000 r = IRRB = 20.69%
r r (1 r ) 2
The IRR of project A is 25.69%, and that of B is 20.69%. However, project B has the
higher NPV and therefore is preferred. The incremental cash flows of B over A are
$20,000 at time 0 and +$12,000 at times 1 and 2. The NPV of the incremental cash
flows (discounted at 10%) is $826.45, which is positive and equal to the difference in
the respective project NPVs.
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Q22: Profitability Index versus NPV. Consider projects A and B with the following cash
flows: (LO8-3)
C0 C1 C2 C3
B – 50 + 25 + 25 + 25
a. Which project has the higher NPV if the discount rate is 10%?
1 1
= $50 + $25 $12.17
0.10 0.10 (1.10) 3
Thus Project A has the higher NPV if the discount rate is 10%.
b. Project A has the higher profitability index, as shown in the table below:
PV of Profitability
Project Investment NPV
Cash Flow Index
A $49.74 $36 $13.74 0.38
B $62.17 $50 $12.17 0.24
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Ch 6
Q11. Real and nominal flows CSC is evaluating a new project to produce encapsulators.
The initial investment in plant and equipment is $500,000. Sales of encapsulators in
year 1 are forecasted at $200,000 and costs at $100,000. Both are expected to
increase by 10% a year in line with inflation. Profits are taxed at 35%. Working capital
in each year consists of inventories of raw materials and is forecasted at 20% of sales
in the following year.
The project will last five years and the equipment at the end of this period will have no
further value. For tax purposes the equipment can be depreciated straight-line over
these five years. If the nominal discount rate is 15%, show that the net present value
of the project is the same whether calculated using real cash flows or nominal flows.
Answer 11)
NPV -147,510
Since the nominal rate is 15% and the expected inflation rate is 10%, the real rate is given by
the following:
(1 + rnominal) = (1 + rreal) (1 + inflation rate)
1.15 = (1 + rreal) (1.10)
rreal = 0.04545 = 4.545%
Adjusting the cash flows to real dollars and using this real rate gives us the same result for
NPV (with a slight rounding error).
YEAR
0 1 2 3 4 5
Net Cash Flows (nominal) -540,000 96,000 102,100 108,810 116,191 188,731
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Adjustment Factor for Real CF 1 0.909 0.826 0.751 0.683 0.621
Net Cash Flows (real) -540,000 87,273 84,380 81,751 79,360 117,187
Discount Factor @ 4.545% 1.000 0.957 0.915 0.875 0.837 0.801
Present Value -540,000 83,479 77,203 71,545 66,434 93,834
NPV -147,505
15. Project NPV After spending $3 million on research, Better Mousetraps has developed
a new trap. The project requires an initial investment in plant and equipment of $6
million. This investment will be depreciated straight-line over five years to a value of
zero, but, when the project comes to an end in five years, the equipment can in fact be
sold for $500,000. The firm believes that working capital at each date must be
maintained at 10% of next year's forecasted sales. Production costs are estimated at
$1.50 per trap and the traps will be sold for $4 each. (There are no marketing
expenses.) Sales forecasts are given in the following table. The firm pays tax at 35%
and the required return on the project is 12%. What is the NPV?
Q15
Note: This answer assumes that the $3 million initial research costs are sunk and excludes
this from the NPV calculation. It also assumes that working capital needs begin to accrue in
year 0.
Unit Sales 500 600 1,000 1,000 600
Revenues 2,000 2,400 4,000 4,000 2,400
NPV -181
Q18. Project NPV A widget manufacturer currently produces 200,000 units a year. It buys
widget lids from an outside supplier at a price of $2 a lid. The plant manager believes
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that it would be cheaper to make these lids rather than buy them. Direct production
costs are estimated to be only $1.50 a lid. The necessary machinery would cost
$150,000 and would last 10 years. This investment could be written off for tax
purposes using the seven-year tax depreciation schedule. The plant manager
estimates that the operation would require additional working capital of $30,000 but
argues that this sum can be ignored since it is recoverable at the end of the 10 years.
If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%,
would you support the plant manager's proposal? State clearly any additional
assumptions that you need to make.
Q20. Project NPV Marsha Jones has bought a used Mercedes horse transporter for her
Connecticut estate. It cost $35,000. The object is to save on horse transporter rentals.
Marsha had been renting a transporter every other week for $200 per day plus $1.00
per mile. Most of the trips are 80 or 100 miles in total. Marsha usually gives the driver
a $40 tip. With the new transporter she will only have to pay for diesel fuel and
maintenance, at about $.45 per mile. Insurance costs for Marsha's transporter are
$1,200 per year.
The transporter will probably be worth $15,000 (in real terms) after eight years, when
Marsha's horse Nike will be ready to retire. Is the transporter a positive-NPV
investment? Assume a nominal discount rate of 9% and a 3% forecasted inflation rate.
Marsha's transporter is a personal outlay, not a business or financial investment, so
taxes can be ignored.
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A20. The table below shows the real cash flows. The NPV is computed using the real rate,
which is computed as follows:
(1 + rnominal) = (1 + rreal) (1 + inflation rate)
1.09 = (1 + rreal) (1.03)
rreal = 0.0583 = 5.83%
t=0 t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8
Investment -35,000.0 15,000.0
Savings 8,580.0 8,580.0 8,580.0 8,580.0 8,580.0 8,580.0 8,580.0 8,580.0
Insurance -1,200.0 -1,200.0 -1,200.0 -1,200.0 -1,200.0 -1,200.0 -1,200.0 -1,200.0
Fuel 1,053.0 1,053.0 1,053.0 1,053.0 1,053.0 1,053.0 1,053.0 1,053.0
Net Cash Flow -35,000.0 6,327.0 6,327.0 6,327.0 6,327.0 6,327.0 6,327.0 6,327.0 21,327.0
NPV (at 5.83%) = $14,087.9
The older machine could be sold today for $25,000. If it is kept, it will need an
immediate $20,000 overhaul. Thereafter operating costs will be $30,000 a year until
the machine is finally sold in year 5 for $5,000.
Both machines are fully depreciated for tax purposes. The company pays tax at 35%.
Cash flows have been forecasted in real terms. The real cost of capital is 12%. Which
machine should United Automation sell? Explain the assumptions underlying your
answer.
24. In order to solve this problem, we calculate the equivalent annual cost for each of the two
alternatives. (All cash flows are in thousands.)
Alternative 1 Sell the new machine: If we sell the new machine, we receive the cash
flow from the sale, pay taxes on the gain, and pay the costs associated with keeping
the old machine. The present value of this alternative is:
30 30 30 30 30
PV1 50 [0 .35(50 0)] 20
1.12 1.12 2 1.12 3 1.12 4 1.12 5
5 0.35 (5 0)
$93.80
1.12 5 1.125
The equivalent annual cost for the five-year period is computed as follows:
PV1 = EAC1 [annuity factor, 5 time periods, 12%]
93.80 = EAC1 [3.605]
EAC1 = 26.02, or an equivalent annual cost of $26,020
Alternative 2 Sell the old machine: If we sell the old machine, we receive the cash
flow from the sale, pay taxes on the gain, and pay the costs associated with keeping
the new machine. The present value of this alternative is:
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20 20 20 20 20
PV2 25 [0.35(25 0)] 2
1.12 1.12 1.123 1.12 4 1.125
20 30 30 30 30 30
1.125 1.12 6
1.12 7
1.12 8
1.129 1.1210
5 0 .35 (5 0)
$127.51
1.1210 1.1210
The equivalent annual cost for the 10-year period is computed as follows:
PV2 = EAC2 [annuity factor, 10 time periods, 12%]
127.51 = EAC2 [5.650]
A Normal Project:
Valuing a new Computer system
Obsolete Technologies is considering the purchase of a new computer system to help handle
its warehouse inventories. The system costs $50,000, is expected to last 4 years, and should
reduce the cost of managing inventories by $22,000 a year. The opportunity cost of capital is
10%. Should Obsolete go ahead?
Answer:
The project has a positive NPV of $19,738. Undertaking it would increase the value of the
firm by that amount.
Answer:
TABLE Obsolete Technologies: The gain from purchase of a computer is
rising, but the NPV today is highest if the computer is purchased in year 3
(dollar values in thousands).
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Year of Cost of PV NPV at Year of NPV
Purchase Computer Savings Purchase (r = 10%) Today
1 45 70 25 22.7
2 40 70 30 24.8
3 36 70 34 25.5
purchase date
4 33 70 37 25.3
5 31 70 39 24.2
Long- and Short Lived Equipment --- Equivalent Annual Cost Concept
Low-energy lightbulbs typically cost $3.50, have a life of 9 years, and use about $1.60 of
electricity a year. Conventional lightbulbs are cheaper to buy, for they cost only $.50. On the
other hand, they last only about a year and use about $6.60 of energy. If the discount rate is
5%, which product is cheaper to use?
To answer this question, you need first to convert the initial cost of each bulb to an annual
figure and then to add in the annual energy cost. The following table sets out the
calculations:
Low-Energy Conventional
Bulb Bulb
It seems that a low-energy bulb provides an annual saving of about $7.12 $2.09 = $5.03.
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Our earlier comparison of machines I and J took the life of each machine as fixed. In
practice, the point at which equipment is replaced reflects economics, not physical collapse.
We usually decide when to replace. For example, we usually replace a car not when it finally
breaks down but when it becomes more expensive and troublesome to keep up than a
replacement.
replacement problem:
You are operating an old machine that will last 2 more years before it gives up the ghost. It
costs $12,000 per year to operate. You can replace it now with a new machine that costs
$25,000 but is much more efficient (only $8,000 per year in operating costs) and will last for 5
years. Should you replace the machine now or stick with it for a while longer? The
opportunity cost of capital is 6%.
Year: 0 1 2 3 4 5 PV at
6%
The cash flows of the new machine are equivalent to an annuity of $13,930 per year. So we
can equally well ask whether you would want to replace your old machine, which costs
$12,000 a year to run, with a new one costing $13,930 a year.
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CAsh Flow Estimation, Capital Budgeting Decisions
a.
The market value of the site.
e. Lost cash flows on other projects due to executive time spent on the new facility.
Answer:
a,b. The site and buildings could have been sold or put to another use.
Their values are opportunity costs, which should be treated as
incremental cash outflows.
e. Lost cash flows from other projects are incremental cash outflows.
It should go without saying that you cannot mix and match real and nominal
quantities. Real cash flows must be discounted at a real discount rate, nominal cash
flows at a nominal rate. Discounting real cash flows at a nominal rate is a big mistake.
Suppose you finance a project partly with debt. How should you treat the proceeds from the
debt issue and the interest and principal payments on the debt? The probably surprising
answer: Regardless of the actual financing, you should view the project as if it were all-
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equity-financed, treating all cash outflows required for the project as coming from
stockholders and all cash inflows as going to them
An Example:
As the newly appointed financial manager of Blooper Industries, you are about to analyse a
proposal for mining and selling a small deposit of high-grade magnesium ore.6 You are
given the forecasts shown in the spreadsheet.
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Financial projections for Blooper's magnesium mine (dollar values in thousands)
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We can now see how Blooper arrives at its forecast of working capital:
0 1 2 3 4 5 6
Project Evaluation.
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it
spent $115 million on equipment with an assumed life of 5 years and an assumed salvage
value of $15 million for tax purposes. The firm uses straight-line depreciation. The old
equipment can be sold today for $80 million. A new modem pool can be installed today for
$150 million. This will have a 3-year life and will be depreciated to zero using straight-line
depreciation. The new equipment will enable the firm to increase sales by $25 million per
year and decrease operating costs by $10 million per year. At the end of 3 years, the new
equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for
projects of this sort is 10%. (LO9-2)
a.
What is the net cash flow at time 0 if the old equipment is replaced?
Answer:
2. a. Annual depreciation is ($115 $15)/5 = $20 million.
Book value at the time of sale is $115 (2 $20) = $75 million.
Sales price = $80 million, so net-of-tax proceeds from the sale are:
$80 (0.35 $5) = $78.25 million
Therefore, the net cash outlay at time 0 is $150 $78.25 = $71.75 million.
b. The project saves $10 million in operating costs and increases sales by $25
million. Depreciation expense for the new machine would be $50 million
per year. Therefore, including the depreciation tax shield, operating cash
flow increases by:
($25 + $10) (1 0.35) + ($50 0.35) = $40.25 million per year
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c. NPV = $71.75 + [$40.25 annuity factor (10%, 3 years)]
1 1
= $71.75 $40.25 $28.35, or $28.35 million
0.10 0.10 (1.10) 3
To find the internal rate of return, set the PV of the annuity to $71.75 and
solve for the discount rate (r):
1 1
$40.25 $71.75 r IRR 31.33%
r r (1 r )3
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Ch 10
Sensitivity Analysis
Sensitivity Analysis. Emperor's Clothes Fashions can invest $5 million in a new plant for
producing invisible makeup. The plant has an expected life of 5 years, and expected sales
are 6 million jars of makeup a year. Fixed costs are $2 million a year, and variable costs are
$1 per jar. The product will be priced at $2 per jar. The plant will be depreciated straight-line
over 5 years to a salvage value of zero. The opportunity cost of capital is 10%, and the tax
rate is 40%. (LO10-2)
c. What is NPV if fixed costs turn out to be $1.5 million per year?
1 1
= $5 million + $2.08 million $2.88 million
0.10 0.10 (1.10) 5
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1 1
= $5 million + $3.1 million $6.75 million
0.10 0.10 (1.10) 5
1 1
= 5 + [(3.6P 4.4)
0.10 0.10 (1.10) 5
Scenario Analysis.
The most likely outcomes for a particular project are estimated as follows:
However, you recognize that some of these estimates are subject to error. Suppose that
each variable may turn out to be either 10% higher or 10% lower than the initial estimate.
The project will last for 10 years and requires an initial investment of $1 million, which will be
depreciated straight-line over the project life to a final value of zero. The firm's tax rate is
35%, and the required rate of return is 12%. (LO10-2)
a. What is project NPV in the best-case scenario, that is, assuming all variables take on the
best possible value?
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Best-case CF = 0.65 [33,000 ($55 $27) $270,000] + (0.35 $100,000) =
$460,100
Worst-case CF = 0.65 [27,000 ($45 $33) $330,000] + (0.35 $100,000) =
$31,100
1 1
12%, 10-year annuity factor = 5.65022
0.12 0.12 (1.12)10
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CH 7 Introducton to Risk and Return
Q5 Diversification In which of the following situations would you get the largest reduction in risk
by spreading your investment across two stocks?
5. (d) This strategy does the most to reduce risks because the stocks move in opposite
directions. When one goes up, the other goes down, and vice versa. This does the most to reduce risk
in a portfolio.
Q6 Portfolio risk To calculate the variance of a three-stock portfolio, you need to add nine boxes:
Use the same symbols that we used in this chapter; for example, x1 = proportion invested in stock
12 = covariance between stocks 1 and 2. Now complete the nine boxes.
Q7 Portfolio risk Suppose the standard deviation of the market return is 20%.
7. a. 26%
b. Zero
c. .75
d. Less than 1.0 (the
market, but some of this risk is unique risk)
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Q8 Portfolio beta A portfolio contains equal investments in 10 stocks. Five have a beta
of 1.2; the remainder have a beta of 1.4. What is the portfolio beta?
i. 1.3.
j. Greater than 1.3 because the portfolio is not completely diversified.
k.Less than 1.3 because diversification reduces beta.
Q13 Risk and diversification Lonesome Gulch Mines has a standard deviation of 42%
per year and a beta of + .10. Amalgamated Copper has a standard deviation of 31%
a year and a beta of + .66. Explain why Lonesome Gulch is the safer investment for a
diversified investor.
This contribution is measured by beta. Lonesome Gulch is the safer investment for a
diversified investor because its beta (+0.10) is lower than the beta of Amalgamated
Copper (+0.66). For a diversified investor, the standard deviations are irrelevant.
CH8
CAPM
a. Investors demand higher expected rates of return on stocks with more variable
rates of return.
b. The CAPM predicts that a security with a beta of 0 will offer a zero expected
return.
c. An investor who puts $10,000 in Treasury bills and $20,000 in the market portfolio
will have a beta of 2.0.
d. Investors demand higher expected rates of return from stocks with returns that are
highly exposed to macroeconomic risks.
e. Investors demand higher expected rates of return from stocks with returns that are
very sensitive to fluctuations in the stock market.
her money in the market, the beta will be: (1/3 0) + (2/3 1) = 0.67.
d. True
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e. True
15. CAPM The Treasury bill rate is 4%, and the expected return on the market
portfolio is 12%. Using the capital asset pricing model:
a. Draw a graph similar to Figure 8.6 showing how the expected return varies with beta.
b. What is the risk premium on the market?
c. What is the required return on an investment with a beta of 1.5?
d. If an investment with a beta of .8 offers an expected return of 9.8%, does it have a positive
NPV?
e. If the market expects a return of 11.2% from stock X, what is its beta?
15. a.
Expected Return
0
0 0.5 1 1.5 2
Beta
d. For any investment, we can find the opportunity cost of capital using the
security market line. With = 0.8, the opportunity cost of capital is:
r = rf + (rm rf)
r = 0.04 + [0.8 (0.12 0.04)] = 0.104 = 10.4%
The opportunity cost of capital is 10.4% and the investment is expected
to earn 9.8%. Therefore, the investment has a negative NPV.
17. Cost of capital Epsilon Corp. is evaluating an expansion of its business. The cash-flow
forecasts for the project are as follows:
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The firm's existing assets have a beta of 1.4. The risk-free interest rate is 4% and the
expected return on the market portfolio is 12%. What is the project's NPV?
17. First calculate the required rate of return (assuming the expansion assets bear
the same level of risk as historical assets):
r = rf + (rm rf)
r = 0.04 + [1.4 (0.12 0.04)] = 0.152 = 15.2%
Discount
Year Cash Flow Factor PV
0 -100 1 -100.00
1 15 0.868 13.02
2 15 0.754 11.30
3 15 0.654 9.81
4 15 0.568 8.52
5 15 0.493 7.39
6 15 0.428 6.42
7 15 0.371 5.57
8 15 0.322 4.84
9 15 0.280 4.20
10 15 0.243 3.64
NPV -25.29
Ch 9
COST OF CAPITAL
Think for a moment what the cost of capital for a project means. It is the rate of return that
shareholders could expect to earn if they invested in equally risky securities. So one way to
estimate the cost of capital is to find securities that have the same risk as the project and
then estimate the expected rate of return on these securities.
11. Cost of capital The total market value of the common stock of the Okefenokee Real
Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer
estimates that the beta of the stock is currently 1.5 and that the expected risk premium
on the market is 6%. The Treasury bill rate is 4%. Assume for simplicity that Okefenokee
debt is risk-free and the company does not pay tax.
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c. What is the discount rate for an expansion of the company's present business?
d. Suppose the company wants to diversify into the manufacture of rose-colored
spectacles. The beta of unleveraged optical manufacturers is 1.2. Estimate the
required return on Okefenokee's new venture.
D E $4 million $6 million
b. rassets rdebt requity 0.04 0.13 .
V V $10 million $10 million
c. The cost of capital depends on the risk of the project being evaluated. If the risk of the
project is similar to the risk of the other assets of the company, then the appropriate
rate of return is the company cost of capital. Here, the appropriate discount rate is
9.4%.
D E $4 million $6 million
rassets rdebt requity 0.04 0.112 .
V V $10 million $10 million
14. Company cost of capital You are given the following information for Golden Fleece
Financial:
14. The total market value of outstanding debt is $300,000. The cost of debt capital is
8%. For the common stock, the outstanding market value is:
$50
company cost of capital is:
300,000 500,000
rassets 0.08 0.15
300,000 500,000 300,000 500,000
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rassets = 0.124 = 12.4%
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