Economics Homework Help
Grossmont College Epsilon Corp Cash Flow & Rate of Return on Stock Worksheet
11. Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows:
Years 0 1 2 3 4 5 6 7 8 9 10
Cash Flow −250 53 53 53 53 53 53 53 53 53 53
($millions)
The firm’s existing assets have a beta of 1.53. The risk-free interest rate is 3% and the expected return on the market portfolio is 15%. What is the project’s NPV?
12. The total market value of the common stock of the Okefenokee Real Estate Company is $8.5 million, and the total value of its debt is $5.1 million. The treasurer estimates that the beta of the stock is currently 1.6 and that the expected risk premium on the market is 9%. The Treasury bill rate is 5%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax.
- What is the required return on Okefenokee stock?
- Estimate the company cost of capital.
13. You are given the following information for Golden Fleece Financial:
Long-term debt outstanding: $ 550,000
Current yield to maturity (rdebt): 8%
Number of shares of common stock: 27,500
Price per share: $ 52.5
Book value per share: $ 29
Expected rate of return on stock (requity): 16%
Calculate Golden Fleece’s company cost of capital. Ignore taxes.
14. A company is 45% financed by risk-free debt. The interest rate is 2%, the expected market risk premium is 10%, and the beta of the company’s common stock is 0.52. What is the after-tax WACC, assuming that the company pays tax at a 40% rate?
15. Do the following question from Chapter 10: #9, #11 on page 277 of the textbook.
