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    Cost of Capital and Net Present Value (NPV)

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    I have a few problems to work on for my practice class. Please show me your steps to the solution/formulas use. Thank you.

    Problem #1

    The market value of Charcoal Corporation's common stock is 20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the treasury bill rate is 5%, what is the company's cost of capital. (Assume no taxes.)

    Problem #2

    A project requires an initial investment in equipement of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t=0). The project is expected to produce sales revenues of $120,000 for each of the three years. Manufacturing costs are estimated to be 60% of revenues. The assets are depreciated using straight-line depreciation without any salvage value. At the end of the project, the firm can sell the equipment for $10,000. The corporate tax rate is 30% and the cost of capital is 15%.

    Calculate the NPV of the project.

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    Solution Summary

    The cost of capital and net present values are examined.