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?