Question

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A standard IRR method (test f IRR dis he folloveing cash flow S. (10 peints) more Nkely to have a problems in which A)-CR D) in both A and B E) In boch B and C F) In boch A and C $1,000 (a fixed money) 6 (Bpoints) Assume that you can invest maximum n four projects at the same disco 150 20% 160 18% 150 19% 130 21% Project Project 2 500 Project4 A) Project I only B) Project 2 only C) Project 4 only D) Project I and Project 2 E) Project 1 and Project 3 F) Project 2 and Project 3 G) Project 3 and Project 4 Note: 7-11 questions are related to each other and write down your calculation 7. (10 points) Based on available information estimate the cost of common equity (required return on common Stock A of "Company A"). Risk free rate is 4,58% and you have next historical information on returns: Return Stock Years Market index 11.11% 10.00% 6.67% 2008 2009-2013 2013-2017 20% 18% 12%

Answer 1

5-	Answer is E	in both A & C
6-	Answer is F	In Project 2 & 3 at which NPV and IRR is highest and investmetn amount is only -900
7-
	Years	Stock A	Market return		Years	Stock A		Years	market index return
	2004-2008	20	11.11		2004-2008	20		2004-2008	11.11
	2009-2013	18	10		2009-2013	18		2009-2013	10
	2014-2018	12	6.67		2014-2018	12		2014-2018	6.67
	Average return = using average function in MS excel = average(20,18,12)    market index average return = (11.11,10,6.67)	16.67	9.26		Average return = using average function in MS excel = average(20,18,12)    market index average return = (11.11,10,6.67)	16.67		Average return = using average function in MS excel = average(20,18,12)    market index average return = (11.11,10,6.67)	9.26
	correlation between stock A return & market index return = Using correlation function in MS excel	1.00			Standard deviation of stock return =Using standard deviation function in MS excel	3.40		Standard deviation of market index return return =Using standard deviation function in MS excel	1.89
	Beta of stock	standard deviation of Stock A return/standard deviation of market index return)*correlation	(3.4/1.89)*1	1.80
	cost of common equity	risk free rate+(market return-risk free rate)*beta	4.58+(9.26-4.58)*1.8	13.00
8-	Year	Formula	expected dividend
	1		9
	2		10
	3	10*1.03	10.3
	terminal value at th end of year 2	expected dividend in year 3/ (required rate of return-growth rate)	10.3/(13%-3%)	103
	Year	cash inflow	present value of cash inflow = cash inflow/(1+r)^n r = 13%
	1	9	7.96460177
	2	10	7.83146683
	2	103	80.6641084
	value of stock		96.46
9-	YTM on bond 1	Using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper = 5 pmt = 1000*3% = 30 pv =- 900 fv =1000 type =0	RATE(5,30,-900,1000,0)	5.33%
	After tax cost of debt	5.33*(1-.30)	3.73
10-	WACC
	Source		value	weight	cost	weight*cost
	debt	200*900	180000	0.51777701	3.73	1.931826027
	common stock	1905*88	167640	0.48222299	13	6.268898861
	total		347640	WACC = total of weight*cost		8.20