PAYBACK METHODS
P8-2: Suppose that a thirty-year U.S. Treasury bond offers a 4 percent coupon rate, paid semiannually. The market price of the bond is $1,000, equal to its par value.
a) What is the payback period for this bond?
b) With such a long payback period, is the bond a bad investment?
c) What is the discount payback period for the bond, assuming its 4 percent coupon rate is the required return? What general principle does this example illustrate regarding a project's life, its discounted payback period, and its NPV?
INTERNAL RATE OF RETURN
P8-9: For each of the projects shown in the following table, calculate the internal rate of return (IRR).
Initial Cash Project A Project B Project C Project D
Outflow (CFo) $72,000 $440,000 $18,000 $215,000
Year (t) Cash inflows (CFt)
1 $16,000 $135,000 $7,000 $108,000
2 20,000 135,000 7,000 90,000
3 24,000 135,000 7,000 72,000
4 28,000 135,000 7,000 54,000
5 32,000 ----- 7,000 -----
CHOOSING THE RIGHT DISCOUNT RATE
P10-1: Intel Corp. (INTC) has a capital structure consisting almost entirely of equity.
a) If the beta of INTC stock equals 1.6, the risk-free rate equals 6 percent, and the expected return on the market portfolio equals 11 percent, what is INTC's cost of equity?
P10-3: In its 2006 annual report, The Coca-Cola Company reported sales of $24.09 billion for fiscal year 2006 and $23.10 billion for fiscal year 2005. The company also reported operating income (roughly equivalent to EBIT) of $6.31 billion, and $6.09 billion in 2005 and 2006, respectively. Meanwhile, arch-rival PepsiCo, Inc. reported sales of $35.14 billion in 2006 and $32.56 billion in 2005. PepsiCo's operating profit was $6.44 billion in 2006 and $5.92 billion in 2005. Based on these figures, which company had higher operating leverage?