Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 8, Problem 17PS
Cost of capital* Epsilon Corp. is evaluating an expansion of its business. The cash-flow
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
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The following are two projects a firm is considering:
Project B
Cash Flow
Year
0
1
2
3
4
$2,939.01
Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine
the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that
the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of
capital is 11 percent. Given this information, determine the modified net present value (MNPV) for
Project B.
O $2.479.00
O $2.965.10
O$3.479.89
Project A
Cash Flow
O $4,084.05
($10,000.00) ($11,000.00)
$3,000.00
$5,000.00
$4,000.00
$4,000 00
$5,000.00
$4,000.00
$2,000.00
$2,000.00
You look at the rate of returns, and the betas of different capital investment options. To
determine which should be pursued, you will look at Internal Rate of Return, the Capital Asset
Pricing Model (Security Market Line), and the Weighted Average Cost of Capital.
The expected return on the market is 12%, and the risk-free rate is 5%.
Project Z: return = 17.0%, beta = 1.81
Project X: return = 10.5%, beta = .90
Project W: return = 10.0%, beta = .55
Project Y: return = 14.0%, beta = 1.10
a. Which projects should be accepted using the CAPM(SML) rule?
Project W should be
Project Y should be
Project X should be
and Project Z should be
The risk-free rate is 7%. The expected rate of return on the stock market (S&P500) is 10%. What is the appropriate cost of capital for a project that has a beta of -0.2? Use CAPM formula.
Select one:
a. Cost of capital = 7.2%
b. Cost of capital = 11%
c. Cost of capital = 6.4%
d. Cost of capital = 12%
Chapter 8 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 8 - Portfolio risk and return Here are returns and...Ch. 8 - Efficient portfolios For each of the following...Ch. 8 - Sharpe ratio Use the long-term data on security...Ch. 8 - Efficient portfolios Figure 8.11 purports to show...Ch. 8 - CAPM Suppose that the Treasury bill rate is 6%...Ch. 8 - CAPM True or false? a. The CAPM implies that if...Ch. 8 - APT Consider a three-factor APT model. The factors...Ch. 8 - CAPM True or false? Explain or qualify as...Ch. 8 - Portfolio risk and return Look back at the...Ch. 8 - Portfolio risk and return Mark Harrywitz proposes...
Ch. 8 - Portfolio risk and return Ebenezer Scrooge has...Ch. 8 - Portfolio beta Refer to Table 7.5. a. What is the...Ch. 8 - CAPM The Treasury bill rate is 4%, and the...Ch. 8 - Portfolio risk and return Percival Hygiene has IO...Ch. 8 - Cost of capital Epsilon Corp. is evaluating an...Ch. 8 - Prob. 18PSCh. 8 - APT Consider the following simplified APT model:...Ch. 8 - Prob. 20PSCh. 8 - Prob. 21PSCh. 8 - Prob. 22PSCh. 8 - Prob. 23PSCh. 8 - Efficient portfolios Look again at the set of the...
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