Complete problem: Cost of Equity-CAP

1. Complete problem: Cost of Equity-CAP

XYZ, Inc. has a beta of 0.8. The yield on a 3-month T-bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the market last year was 15%.

1. What is the estimated cost of common equity using the CAPM? Show your work.
2. Complete problems: NPV, IRR, MIRR, Profitability Index, Payback, Discounted Payback

A project has an initial cost of $60,000, expected net cash inflows of $10,000 per year for 8 years, and a cost of capital of 12%. Show your work.

1. What is the projectNPV? (Hint: Begin by constructing a timeline.)
2. What is the projectIRR?
3. What is the projectMIRR?
4. What is the projectPI?
5. What is the projectpayback period?
6. What is the projectdiscounted payback period?
7. Your division is considering two investment projects, each of which requires an up-front expenditure of 20 million. You estimate the investment will produce the following net cash flows:

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

1. What are the two projects’ net present values, assuming the cost of capital is 5%? 10%? 15%?
2. What are the two projects’ IRRs at the same cost of capital? Show your work.

Prepare this assignment as a Word document. List each question, followed by your answer.

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