You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows:
Years | Cash Flow | ||
0 | – | 100 | |
1 - 10 | + | 18 | |
On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.45. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market portfolio is 14%.
a. What is the project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. What is the cost of capital for the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
a) Project IRR can be calculated using I/Y function on a calculator
N = 10, PMT = 18, PV = -100, FV = 0
=> Compute I/Y = 12.41%
b) Cost of capital, r = Rf + beta x (Rm - Rf) = 6% + 1.45 x (14% - 6%) = 17.60%
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow...
You are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 - 100 1 - 10 + 18 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.45. Assume that the rate of return available on risk-free investments is 6% and that the expected rate of return on the market...
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