Unit 5 Assignment Charles Murphy GB-540 9-10 The earnings‚ dividends‚ and stock price of Shelby Inc. are expected to grow at 7% per 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 discounted cash flow approach‚ what is the cost of equity? Using the formula of ks = [pic] + g‚ you would take the cost dividend($2.14) divided by the stock share price of
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currently offered products. Or not to introduce the new product and lease out it’s space‚ or do nothing to save the space until it’s needed for its current product line. 1) Incremental cash flows are the cash flows that should be used in calculating the NPV of a project. The cash flows are changes in cash flows that occur as a direct consequence of accepting a project‚ not the cash flows that the company is already receiving. No we do not include interest expense in the capital budging process‚ because
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Answers to Problem Sets 1. a. A = 3 years‚ B = 2 years‚ C = 3 years b. B c. A‚ B‚ and C d. B and C (NPVB = $3‚378; NPVC = $2‚405) e. True f. It will accept no negative-NPV projects but will turn down some with positive NPVs. A project can have positive NPV if all future cash flows are considered but still do not meet the stated cutoff period. 2. Given the cash flows C0‚ C1‚ . . . ‚ CT‚ IRR is defined by: It is calculated by trial and error
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6/14/2003 Chapter 11 Mini Case Situation Shrieves Casting Company is considering adding a new line to its product mix‚ and the capital budgeting analysis is being conducted by Sidney Johnson‚ a recently graduated MBA. The production line would be set up in unused space in Shrieves ’ main plant. The machinery’s invoice price would be approximately $200‚000; another $10‚000 in shipping charges would be required; and it would cost an additional $30‚000 to install the equipment. The machinery has
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to do with retention but with the NPV of the extra funds (either retained or raised): if NPV is zero‚ dividend irrelevance applies. Yet‚ the dichotomy retention/no-retention is useful‚ because if agency problems are present‚ managers tend to retain funds and invest them in negative-NPV projects‚ and therefore the zero-NPV assumption must be removed‚ so that dividend irrelevance does not apply any more. Keywords. Dividend policy‚ irrelevance‚ retention‚ zero-NPV‚ epistemology‚ modelling‚ agency theory
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Washington State University Finance 325 Practice Problems 1. What is the net present value of a project with the following cash flows and a required return of 12 percent? Year 0 1 2 3 Cash Flow -$28‚900 $12‚450 $19‚630 $ 2‚750 2. What is the net present value of a project that has an initial cash outflow of $12‚670 and the following cash inflows? The required return is 11.5 percent. Year 1 2 3 4 Cash Inflows $4‚375 $ 0 $8‚750 $4‚100 3. A project will produce cash inflows of $1‚750
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Case 20: PEPSICO CHANGCHUN JOINT VENTURE Capital Expenditure Analysis Study Questions Q1. Use the information in the case to construct two sets of NPV and IRR analysis from joint venture view and Pepsico. Based on the results‚ what would be your decision on the proposed Changchun joint venture? Q2. Comment on the financial projections that PepsiCo used in its capital budgeting exercise‚ especially the NOPBT Cap‚ foreign exchange rate projection and the discount rate. Q3. What differences might
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determining which Corporation would be the better buy we will look at the Net Present Value (year 1 through 5) of both Corporations‚ determine the Internal Rate of Return‚ and conduct an analysis of the information gathered. Net Present Value (NPV) Net Present Value (NPV) is the sum of income and outgoing cash flows based on the present value of the same entity. If the net present value of the investment is positive an investment should be made otherwise‚ if net present value is negative an investment should
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firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects‚ even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time. Using the NPV to determine which projects to undertake leads to greater risk over time because best case scenario you can estimate the NPV in advance but the actual value of the project
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This case provides insight into how capital budgeting decisions are made and the factors that influence the decision making process of large corporations. Specifically‚ the case centers on the capital expenditure meeting for the Target Corporation‚ which is one of the top ten retailers in the United States. All corporations have some version of this meeting. The goal of the meeting is to determine what capital expenditure projects the company will undertake in the future to promote growth. Below
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