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Gb550 Unit 5 Assignment

In: Business and Management

Submitted By mlevene66
Words 390
Pages 2
Unit 5 Assignment
Author: Michael J. Levene, Kaplan University

Date: 27th May 2012

Course: Financial Management

Week Number: 5

Professor’s Name: Dr. William Hudson

Problem 9-10 Page 371-372

Shelby Inc. Share price $23.00 Last dividend $2.00 Next dividend $2.14 Growth 7% Beta 1.6 rRF 9% rM 13%

-A- Cost of equity using discounted cash flow approach?

P0=D1/(rs – g) so rs = D1/P0 + g = 2.14/23 + 7 = 9.30 + 7.00 = 16.30%

-B- Cost of equity using CAPM approach?

RPM = rm - rRF = 13 – 9 = 4%
Rs = rRF + (RPm)bi = 9.0 + (4)*1.6 = 9.0 + 6.4 = 15.40%

-C- Cost of equity using over-own-bond-yield-plus-judgmental-risk-premium approach?

Rs = 12% + RPM = 12.0 + (rM - rRF) = 12.0 + (13.0 – 9.0) = 16.00%

-D- Estimate based on results in part A, B and C

A fair estimate could be obtained using any specific method or an average of the methods. Taking an average of the method would give an estimated cost of capital of 16.3 + 15.4 + 16 /3 = 15.90%
Problem 10-1 through 10-7 p.414

• $52,125 investment • $12,000 return for 8 years starting at the end of year 1 • 12% cost of capital

10-1 Project NPV?

|Year |0 |1 |2 |3 |4 |
|Project A | (15,000,000) | 5,000,000 | 10,000,000 | 20,000,000 | 20,000,000 |
|5% | (15,000,000) | 4,761,905 | 9,070,295 | 17,276,752 | 16,108,952 |
|10% | (15,000,000) | 4,545,455 | 8,264,463 | 15,026,296 | 12,836,213 |
|15% | (15,000,000) | 4,347,826 | 7,561,437 | 13,150,325 | 10,059,587 |
| | | | | | |
|Project B | (15,000,000) | 20,000,000 |

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