An all-equity firm is considering the following projects: Project Beta IRR W .83 9.4% .92 11.6 1.09 12.9 1.35 14.1 Y The T-bill rate is 4 percent, and the expected return on the market is 12 percent. a. Compared with the firm's 11 percent cost of capital, Project W has a expected return, Project X has a expected return, Project Y has a expected return, and Project Z has a expected return. Project X should be b. Project W should be and Project Z Project Y should be should be

An all-equity firm is considering the following projects: Project Beta IRR W .83 9.4% .92 11.6 1.09 12.9 1.35 14.1 Y The T-bill rate is 4 percent, and the expected return on the market is 12 percent. a. Compared with the firm's 11 percent cost of capital, Project W has a expected return, Project X has a expected return, Project Y has a expected return, and Project Z has a expected return. Project X should be b. Project W should be and Project Z Project Y should be should be

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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30. CAPM and Cost of Capital. Suppose the Treasury bill rate is 4% and the market risk premium is 7%. (LO12-3) a. What are the project costs of capital for new ventures with betas of .75 and 1.75? b. Which of the following capital investments have positive NPVS? Project Beta Internal Rate of Return (%) 1.0 14 R 2.0 18 S 0.4 7 T 1.6 20
An all equity financed company is considering an independent project with an internal rate of return (IRR) of 11%. Assume the market risk premium is 6% and risk free rate is 3%. The beta of the company's stock is 1.4. Using the Capital Asset Pricing Model (CAPM), the company should accept this project. Question options: a) True b) False
Consider an economy with three states which occur with probability (0.2, 0.2, 0.6). Suppose a firm has a project which generates the state dependent cash flows (100, 240, 220) at t=1. The investment costs are 170 at t=0. The firm has 170 at t=0. The market portfolio generates the payoff (200, 230, 260) and has an expected return of 10%. The risk free rate is 2%. Suppose the CAPM holds. (a) What is the beta of this project? (b) What is the net present value of the project? Explain whether the firm should conduct the project.
The Treasury bill rate is 5% and the market risk premium is 8%. Internal Rate of Project Beta Return, % 0.95 14 0.00 12 R. 2.00 21 0.35 13 1.60 23 a. What are the project costs of capital for new ventures with betas of 0.70 and 1.59? (Do not round intermediate calculations. En your answers as a percent rounded to 2 decimal places.) Beta Cost of Capital 0.7 1.59 % b. Which of the capital investments shown above have positive (non-zero) NPV's? (You may select more than one answer. Singl the box with the question mark to produce a check mark for a correct answer and double click the box with the question me empty the box for a wrong answer.) ? Project P
**Please solve using Excel and show formulas. Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Years Cash Flow($ millions) 0 −170 1-11 45 The firm's existing assets have a beta of 2.1. The risk-free interest rate is 3% and the expected return on the market portfolio is 14%. What is the project's NPV? (Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV= ___ million
You are considering a project that will cost $50,000 to set up, and will pay out $18,000 1,2,3 and 4 years from today. The unlevered beta for this project is 1.2, the risk free rate is 6.5%, and the expected return on the S&P 500 is 15%. Corporate taxes are 25%. a. What is the unlevered cost of equity for this project? b. What is the NPV of this project if you finance with all equity? c. You are considering borrowing $30,000 to finance this project, with repayment in 4 years. You could normally borrow at 7.5%. The Nebraska state government has offered to lend you the money at 6%. What is the adjusted present value of this project if you take the subsidized loan?
The Treasury bill rate is 3% and the market risk premium is 8%. a. What are the project costs of capital for new ventures with betas of 0.60 and 1.15? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Beta Cost of Capital 0.6 % 1.15 % b. Which of the capital investments (Project P,Q,R,S,T) shown in image have positive (non-zero) NPV's? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)
An all-equity firm is considering the following projects: Project Beta IRR W .67 9.5 % X .74 10.6 Y 1.37 14.1 Z 1.48 17.1 The T-bill rate is 5.1 percent, and the expected return on the market is 12.1 percent. a. Which projects have a higher/lower expected return than the firm’s 12.1 percent cost of capital?
Company X has two mutually exclusive projects. Project 1 has an IRR of 5% and a Beta equal to 1/2. Project 2 has an IRR of 20% and Beta equal to 2. Assume that the risk-free rate is zero, the market risk premium is 10%, the projects are 100%equity financed and the CAPM holds. Then, A. Project 1 is better than project 2 B. Project 2 is better than project 1 C. The company should be indifferent between the two projects D. If the company’s Beta is less than 2, then project 2 is preferable
Beta of a project. Magellan is adding a project to the company portfolio and has the following information: the expected market return is 12.7%, the risk-free rate is 2.4%, and the expected return on the new project is 16.5%. What is the project's beta? What is the project's beta? (Round to three decimal places.)
Finance
Pronto Email service has a beta of 0.95 and a cost of equity of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years. What discount rate should be assigned to this project? a. 13.33% b. 13.84% c. 12.67% d. 13.62%

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