)  The earning, dividends, and stock price of Shelby Inc. are expected to  grow at 7% our 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) Using the discounted cash flow approach, what is its cost of equity?

b) If the firm’s beta is 1.6, the risk-free rate is 9%, and the expected return on the the market is 13%, then what would 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 r, using the 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 Part a through c, what would be your estimate of Shelby’s cost of equity?

10-1: NPV) A project has an initial cost of $40,000, expected net cash inflows of $9,000 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: IRR) Refer to Problem 10-1. What is the project’s IRR?

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

10-4: Profitability Index) Refer to problem 10-1. What is the project’s PI

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

10-6: Discounted payback) Refer to problem 10-1. What is the project’s discounted payback period?

10-7: NPV) 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 flow:

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%?

b) What are the two projects’ IRRs at these same cost of capital?

Chapter 25 Question, 25-1

Define the following terms, using graphs or equations to illustrate your answers wherever feasible:

a)  Portfolio; feasible set; efficient portfolio; efficient frontier

b)  Indifference curve; optimal portfolio

c)  Capital Asset Pricing Model (CAPM); Capital Market Line (CML)

d)  Characteristic line; beta coefficient, b

e)  Arbitrage Pricing Theory (APT) 

Chapter 25 – Problem 25-2

An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate of 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?