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October 3rd, 2015, 11:03 PM   #1
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Need urgent help on my homework! date due tml.

Question 1 (help on part b & part c)

The company plans to pay a dividend of \$5 per share at the end of the first year. It then promises its investors that its dividends will grow at a rate of 7% for the next 10 years after the end of the first year and at 5% after that.

Suppose that you are given the additional information: risk-free rate = 1.25%, beta of stock = 0.8, expected market return = 12%.

(a) Apply the Capital Asset Pricing Model to compute a suitable discount rate for the stock.

0.0125 + 0.8(0.12-0.0125) = 0.0985


(b) Compute the value of the stock


(c) If the investor thinks that the growth projection is too optimistic and the growth rates need to be reduced to 5% for the next 10 years after the first year and 0% after that, how would she value the stock now?


Question 2

A company is studying its finances for an development project. The project is planned to initiate on 1 Jan 2016 and is able to produce revenue cash flows starting from \$20 million on 1 Jan 2017 and this is expected to grow at 13% per year until 1 Jan 2025. All revenue cash flows are assumed to occur on the 1 Jan of each year.

The initial cost of the project is \$100 million.

Assume that the beta of K&L Construction is 1.1, the risk-free rate is 1.7% and the market risk premium is 9.5%.

(a) Compute the cost of capital for the project. Explain the assumption that is made.

Is the cost of capital: 0.017 + 1.1(0.095) = 0.1215?

But if this is the case, the cost of capital is more than the expected growth rate, can someone help explain on this?


(b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016).


(c) Calculate the internal rate of return for the project.

Last edited by skipjack; October 4th, 2015 at 01:04 AM.
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October 3rd, 2015, 11:10 PM   #2
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Sorry about formatting~

Question 1

The company plans to pay a dividend of \$5 per share at the end of the first year.
It then promises its investors that its dividends will grow at a rate of 7% for the next 10 years after the end of the first year and at 5% after that.

Suppose that you are given the additional information:
risk-free rate = 1.25%, beta of stock = 0.8, expected market return = 12%.

(a) Apply the Capital Asset Pricing Model to compute a suitable discount rate for the stock.

(b) Compute the value of the stock

(c) If the investor thinks that the growth projection is too optimistic and the growth rates need to be reduced to 5% for the next 10 years after the first year and 0% after that, how would she value the stock now?


Question 2
A company is studying its finances for a development project.
The project is planned to initiate on 1 Jan 2016 and is able to produce revenue cash flows starting from \$20 million on 1 Jan 2017 and this is expected to grow at 13% per year until 1 Jan 2025. All revenue cash flows are assumed to occur on the 1 Jan of each year.

The initial cost of the project is \$100 million.
Assume that the beta is 1.1, the risk-free rate is 1.7% and the market risk premium is 9.5%.

(a) Compute the cost of capital for the project. Explain the assumption that is made.

(b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016).

(c) Calculate the internal rate of return for the project.

Last edited by skipjack; October 4th, 2015 at 01:06 AM.
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December 4th, 2015, 10:16 AM   #3
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Many of the terms you are using, for example, "Capital Asset Pricing Model","cost of capital", and "internal rate of return" are from economics or business administration, not mathematics, so you cannot really expect people here to understand what they mean.
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