Chapter 8

Question 1 (of 1)

1.value:

Problem 8-6 CAPM
Suppose that the Treasury bill rate is 6% rather than 2%. Assume that the expected return on the market stays at 10%. Use the following information.

Stock Beta (β)
A 1.78
B 1.54
C 1.53
D 0.98
E 0.95
F 0.80
G 0.75
H 0.66
I 0.42
J 0.40

a. Calculate the expected return from H. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected return %

b. Find the highest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Highest expected return
%

c. Find the lowest expected return that is offered by one of these stocks. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Lowest expected return
%

d. Assume that the expected market return stays at 10%. Would C offer a higher or lower expected return if the Treasury bill interest rate were 6% rather than 2%?


Higher
Lower

e. Assume that the expected market return stays at 10%. Would I offer a higher or lower expected return if the interest rate were 6% rather than 8%?


Higher
Lower
rev: 02_12_2015_QC_CS-6165, 02_19

2.Problem 9-2 WACC
A company is 38% financed by risk-free debt. The interest rate is 11%, the expected market risk premium is 9%, and the beta of the company's common stock is 0.61.

a. What is the company cost of capital? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Cost of capital
%

b. What is the after-tax WACC, assuming that the company pays tax at a 30% rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

After-tax WACC

3.Problem 6-8 Equivalent annual cash flows

Machines A and B are mutually exclusive and are expected to produce the following real cash flows:

Cash Flows ($ thousands)

Machine C0 C1 C2 C3

A -113 +123 +134
B -133 +123 +134 +146

The real opportunity cost of capital is 9%. (Use PV table.)

a. Calculate the NPV of each machine. (Do not round intermediate calculations. Enter your answers in thousand rounded to the nearest whole number.)

Machine NPV
A $

B $

b. Calculate the equivalent annual cash flow from each machine. (Do not round intermediate calculations. Round "PV Factor" to 3 decimal places. Enter your answers in thousand rounded to the nearest whole number.)

Machine Cash flow
A $

B $

c. Which machine should you buy?

Machine A
Machine B

4. Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of ¥16.1 billion. The cost of capital is 11%. The initial investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%.

Consider the following estimates for the scooter project.

Market size 1.21 million
Market share 0.1
Unit price ¥ 510,000
Unit variable cost ¥ 470,000
Fixed cost ¥ 2.11 billion

What is the NPV of the electric scooter project? (Negative amount should be indicated by a minus sign. Enter your answer in billions. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Net present value ¥ billion