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|Project A||Project B|
|Year||Cash Flow||Year||Cash Flow|
NPV for Project A using a 5% discount rate
NPV = -10,000 + (60,000/(1+.05)) + (0/(1+.05)) + (60,000/(1+.05))
= -10,000 + 57,142.8571 + 0 + 57,142.8571
NPV for Project B using a 5% discount rate
NPV = -1 + (0/(1+.05)) + (0/(1+.05)) + (100/(1+.05))
= -1 + 0 + 0 + 95.2381
In a situation where Projects A and B are mutually exclusive, an investment in Project A would be much more effective and beneficial that Project B. The NPV value of Project A is much higher indicating that the investor is bound to generate a high return. The non-conventional cash flows are attributed to the value of investment for each project. In this case, the higher the value, the higher the profits. Therefore, the greater the risk on the investment of the projects that greater the benefits.
Table 1 calculates the geometric average return which shows a #Null value, arithmetic average return #120%, variance #2.650714, and standard deviation for the stock #1.628101.
The graph compares the mean and the standard deviation of the variables presented. This shows that the investment has a higher standard deviation than the average mean. Furthermore, the geometric mean has a null value indicating that the negative figures complicate the rate of return of the investment. The arithmetic average return shows a positive value which indicates that while the investment remains unproductive it is resilient.
Stock Z Beta = 2
Treasury Bills return = 0.1%
Avg. Return of S&P 500 last 20 years = 6%
Expected Return for Stock Z?
= (0.1 + 6) * 2
The beta (β) presents the rate of competitiveness of the stock in the 20-year period. This is critical to emphasize the rate of return in which the stock is bound to generate over the years.
Stock Z = #3 above
Currently Trading at $700
Forecasted Stock Price in 1 year = $640
Forecasted rate of return = ((700-640) / 700) * 100
= 8.5714 %
The forecasted rate of return for the stock has a depreciation value of 8.5714%.
The stock is currently underpriced since it is bound to depreciate in value over the next one year. This shows that there is no profit generated rather the stock is bound to incur some losses. Therefore, the stock’s investment induces an adverse effect.
Equity = $400
Assets = $600
Avg. YTM on debt = 8%
Tax rate = 21%
Annual dividends in perpetuity = $1
Stock price = $10
Weighted Average Cost of Capital (WACC) =??
WACC = (E/V * Re) + (D/V * Rd * (1-Tc))
E = Market value of the firm’s equity
D = Market value of the firm’s debt
V = E + D
Re = Cost of equity
Rd = Cost of debt
Tc = Corporate Tax
WACC = (600/648 * 400) + (48/648 * 48 * (1-.21))
= 370.3704 + 2.8089