Question

Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,773,750. Expected cash flows over the next four years are $350,000, $828,000, $1,230,000, and $1,350,000. Given the company's required rate of return of 11 percent, what is the NPV of this project?

Group of answer choices $300,672.27 $400,896.36 $1,102,465.00 $1,002,240.91

Question 8 TeleNyckel, Inc, has a beta of –0.29 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 2 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?

Group of answer choices .61% .72% .55% .39%

Question 9 Car Depot expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

Group of answer choices $29.05 26.77 27.89 30.21 31.42

Answer 1

7.Computation of NPV

Computation of Present value of Cashinflows:

Year	Cash flow	Disc @ 11%	Discounting factor	Discounted Cash flows( Discounting factor * Cash flow)
1	$350,000	1/( 1.11)^1	0.9009	$315,315.32
2	$828,000	1/( 1.11)^2	0.8116	$672,023.37
3	$1,230,000	1/( 1.11)^3	0.7312	$899,365.40
4	$1,350,000	1/( 1.11)^4	0.6587	$889,286.82
	Total			$2,775,990.90

We know that NPV = Present value of Cashinflow-Initial outlay

= $ 2775990.90-$ 1773750

= $ 10,02240.90

Hence NPV of a project is $ 10,02240.90. So 4th option is correct.

8) Computation of After tax Cost of Capital

Given Risk Free rate = 2%.

Market Risk premium = 5%

Beta = -0.29

We know that Cost of Equity under CAPM Model

Ke = Rf +Beta ( Rm - Rf)

Here Rf = Risk free rate

Rm - Rf = Market risk premium

Ke = Cost of Equity

Ke = Rf +Beta ( Rm - Rf)

2% + -0.29( 5)

2% -1.45%

0.55%

Hence Cost of Equity = 0.55%.So  3rd option is correct.

9) Computation of Current Marketprice

Given Risk Free rate = 3%.

Market Risk premium = 5.5%

Beta =1.20

We know that Cost of Equity under CAPM Model

Ke = Rf +Beta ( Rm - Rf)

Here Rf = Risk free rate

Rm - Rf = Market risk premium

Ke = Cost of Equity

Ke = Rf +Beta ( Rm - Rf)

= 3% + 1.20( 5.5)

= 3% +6.6%

= 9.60%

Hence Cost of Equity = 9.6%

Computation of Dividend Amount

Year	Dividend
1	$ 1.25*1.25 = $ 1.5625
2	$ 1.5625*1.25= $ 1.9531
3	$ 1.9531*1.25= $ 2.4414
4	$ 2.4414*1.25= $ 3.0518

* Dividend in Every year = Dividend in Previous year ( 1+g)

From year 5 there is the growth in dividend falls to 0.

Hence Dividend amount from year 5 is $ 3.0518

We know that Market Price of a share reflects the present value of the future cash inflows

Year	Cash flow	Disc @ 9.6%[ 1/{( 1+i)^n -1}]	Discounnting factor	Discounted Cashflows( Cashflow* Discounting factor)
1	$1.5625	1/( 1.096)^1	0.91241	$1.42564
2	$1.9531	1/( 1.096)^2	0.83249	$1.62594
3	$2.4414	1/( 1.096)^3	0.75957	$1.85442
4	$3.0518	1/( 1.096)^4	0.69304	$2.11502
4	$31.7896	1/( 1.096)^4	0.69304	$22.03144
	Total			$29.05

Hence Current Market price = $ 29.05. Hence option 1 is correct.

From Year 5 onwards there is a perpetuity of $ 3.0518 dividend amount every year

Hence Present value of dividend at year 4 = Dividend amount / Cost of Capital

= $ 3.0518/ 0.096

= $ 31.7896

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