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NPV, unlevered beta, cost of debt, cost of equity

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Problems (also attached):

1. The Saltinero Company is considering two investments (data attached). The firm's cost of capital Is 12% and the risk-free rate is 7%.
A. Compute the NPV of the 2 investments using the firm's cost of capital. Identify the preferred investment.
B. Compute the NPV of the 2 investments using the certainty-equivalent approach. Identify the preferred investment.

4. Use the data for Saltinero Company (above). The beta of Investment A is 1.0, and the beta of B is 1.5. The market risk premium is 6 percent. Compute the NPV of the two investments using the risk-adjusted discount rate approach. Identify the preferred investment.

5. Suppose Firm A's levered beta is 0.75, its D/E ratio is 0.62, and its tax rate is 34 percent. Calculate its unlevered beta.

6. Suppose the 10-year Treasury rate is current 3.54 percent. You analyze your firm's financial ratios and determine that it is most similar to BB-rated firms, which currently have a spread over the 10-year Treasury of 400 basis points. Calculate your firm's cost of debt.

7. Firm B expects to pay a dividend next year of $4 per share and that its dividend will grow at a constant rate of 5 percent indefinitely into the future. Firm B's stock price is currently $25 per share. Use the dividend discount model to calculate the cost of equity.

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The solution calculates NPV, unlevered beta, cost of debt, cost of equity

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