1) Total market value of common stock of Molino is 6 million dollars and total value of debt is 4 million dollars. Treasurer estimates that beta of the stock is presently at 1.5 expected risk premium on the market is 6%, Treasury bill rate is 4%. Suppose for simplicity that debt of Molino's is risk free and company does not pay tax.
a) Determine the required return on Molino Stock
b) Evalaute the company cost of capital
2) Present Value-
As the winner of the Breakfast cereal competition you can select one of the give prizes which one would you select,
a) 100,000
b) 180,000 at the end of 5 years
c) 11,400 a year forever
d) 19,000 for each of the next 10 years
e) 6,500 next year increasing 5% a year forever
If interest rate is= 12% which is most valuable?
3) Annuities-
Sam is 65 years of age and has the life expectancy of 12 years more. He desires to invest 20,000 in the annuity which will make the level payment at the end of each year until his death. If interest is 8% what can Sam receive each year?
4) David and Jasmine are saving to purchase the boat at the end of 5 years. If boat costs 20,000 and they can earn= 10% a year on their savings how much do they require to save at the end of years 1 through 5?
IRR Rule-
Which is the best investment?
Cash Flows($thousands)
Project Co C1 C2 IRR
A -400 +250 +300 23
B -200 +140 +179 36
Opportunity cost of capital is 9%. John is tempted to take B which has higher IRR .
a) Describe to John why this is not the right procedure.
b) Illustrate him how to adapt IRR rule to select the best project.
c) Illustrate him that this project also has high NPV.