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Shelby Inc: Analyzing Projects': NPV, IRR, MIRR, PI & Cost of Equity Using the CAPM Approach

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1. Project S has a cost of $10000 and is expected to produce benefits (cash flows) of $3000 per year for 5 years. Project L cost $25,000 and is expected to produce cash flows of $7400 per year for 5 years. Calculate the two projects' NPVs, IRRs, MIRRs, and PIs, assuming they are mutually exclusive, using each ranking methods? Which should actually be selected?

2. The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby's common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.

a. Using the discounted cash flow approach, what is its cost of equity?

b. If the firm's beta is 1.6 , the risk free rate is 9%, and the expected return on the market is 13%, what will be the firm's cost of equity using CAPM approach?

c. If the firm's bonds earn a return of 12%, what will Rs be using bond-yield-plus-risk-premium approach?

d. On the basis of the results of parts a through c, what would you estimate Shelby's cost of equity to be?

3. Thress industries just paid a dividend of $1.50 a share (i.e., D0=$1.50). The dividend is expected to grow 5% a year for the next 3 years, and then 10% a year thereafter. What is the expected dividend per share for each of the next 5 years?

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