7 You Work For The 3T Company Which Expects To Earn At Least 18 Percent On Its Investments You Have To Choose Between Two Similar Projects Your Analysts Predict That Inflation Rate Will Be A Sta Essays and Term Papers
| |Year 0 |
Since the NPV is positive, accept project.
4. Youwork for the 3Tcompany, whichexpects to earn at least18percent on its investments. Youhave to choosebetweentwosimilarprojects. Youranalystspredict...
| |Year 0 |
Since the NPV is positive, accept project.
4. Youwork for the 3Tcompany, whichexpects to earn at least18percent on its investments. Youhave to choosebetweentwosimilarprojects. Youranalystspredict...
at least18percent on its investments. Youhave to choosebetweentwosimilarprojects. Youranalystspredict that inflationrate will be a stable 3 percent over the next 7 years. Below is the cash flow information for each project. Which of the twoprojects would you fund if the decision is...
| |Year 0 |
Since the NPV is positive, accept project.
4. Youwork for the 3Tcompany, whichexpects to earn at least18percent on its investments. Youhave to choosebetweentwosimilarprojects...
by the state in whichyou live, opportunities exist to sell the claim today for an immediate lump-sum cash payment. a. What is the leastyou will sell your claim for if you could earn the following rates of return on similar risk investments during the ten-year period? 1. 6 percent 2. 9 percent 3...
you can borrow all of the money you need for a project at 6 per cent, the cost of capital for this project is 6 percent. 2 . Your company's weighted-average cost of capital is 1 1 percent. You believe the company should make a particular investment, but its in ternal rate of return is only 9...
present value.
Example two:
solve for
required rate of
return
Suppose that you buy a share of stock in a company for $50, whichyou
know is the appropriate price for the stock. The next dividend will be
$2, and youexpect that the dividend will grow at a 10% annual rate.
What is your required...
= 0.1556 or 15.56%
Given the expected inflationrate of 8%, the investor should invest at a 15.56% nominal rate to earn a 7% real rate on the investment.
In the Practice Exercise that follows, you will have an opportunity to practice what youhave learned about calculating effective interest rates...
that when you can earn more interest, you need less of your own money to reach the same future dollar amount. They can also base their answer on the present value formula.
52. You are considering two separate investments. Both investments pay 7percent interest. Investment A pays simple interest...
should have the highest growth rate of earnings.
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14. Youhave been reading about the Maddy Computer Company (MCC), which currently retains 90 percent of its earnings ($5 a share this year). It earns an ROE of almost 30 percent. Assuming a required rate of return of 14...
. Ideally, the ROIC each year would equal the internal rate of return on the investment. Using the classic IRR formula, you would find that Company R earns an average ROIC of 15 percent over the life of the restaurant. To correct for this discrepancy, you could mimic the IRR by employing an approach...
have a constant growth rate of 7% per year. The risk free rate of return is 6%, the market risk premium is 8%, and the beta for this company is 1.0. The stock price is
a. $42.86
b. $18.34
c. $17.14
d. $40.05
e. none of the above
13. Xila expects to earn $4.00 per share next year...
company in five years will be $32 per share, if you perform exactly as anticipated, expectations beyond five years do not change, and investors
continue to expect a 10 percent return from alternative investments. Assume that youhave not paid any dividends. So an investor who bought
stock for $20 per...
it is 5 percent? b. Suppose that you demand a real rate of interest of 3 percent on yourinvestments. What nominal interest rate do you need to earn if the inflationrate is zero? If it is 5 percent?
Here is a useful approximation. The real rate approximately equals the difference between the...
tight range between7 and 11 percent, except during the years between 2005 and 2008
7. Which industry tend to have high median ROIC. What are the characteristics of this group of companies?
Pharmaceuticals and biotechnology companies tend to have the highest median ROIC due to patent protected...
interest of 3 percent on yourinvestments. What nominal interest rate do you need to earn if the inflationrate is zero? If it is 5 percent?
Here is a useful approximation. The real rate approximately equals the difference between the nominal rate and the inflationrate:6 Real interest rate...
ﬁrst payment starting today. The interest rate at your bank is 7percent per year compounded annually. Which option has the greater present value? (Ignore any tax differences between the two options.) Solution: To compare the two options, ﬁnd the present value of each at time t = 0 and choose the one...
of these investmentshave positive NPVs? Which would you advise Norman to take? 8. Show that your answers to Practice Question 7 are consistent with the rate of return rule for investment decisions. 9. Take another look at investment opportunity (d) in Practice Question 7. Suppose a bank offers...
years do not change, and investors
continue to expect a 10 percent return from alternative investments. Assume that youhave not paid any dividends. So an investor who bought
stock for $20 per share today could sell the share for $32 in five years. The
annualized return would be 10 percent...
rate of return on the highest-yielding security? Your personal tax rate is 36 percent. You can invest in either corporate bonds that yield 9 percent or municipal bonds (of equal risk) that yield 7percent. Whichinvestment should youchoose? (Ignore state income taxes.) The Klaven Corporation has...