QUESTION 17 XYZ Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars) Items Year 1 Year2 Revenues 125 160 Costs of Good sold and operating expenses and other 40 60 than depreciation Depreciation 25 36 Increase in net working capital 5 8 Capital expenditures 30 40 Marginal corporate tax rate 35% 35% What are the incremental earnings for this project for years 1 and 2? (2 marks) If the initial investment of the project is 10 thousand dollars and the cost of capital for this project is 15%, what is your estimate of the value of the new project using the DFCF approach? (1.5 marks) d. If XYZ has a debt of 5 thousand dollars and its number of shares outstanding is 2 thousand shares, what is the price of its stock? (15 marks) C TT T Arial 3 (12pt) T-SE Using the data in the following table, Year Stock A Stock B 2004 - 1095 2005 20% 2006 596 796 2007 1096 -10% 2008 596 1046 20% 896 a) Estimate (a) the average return and volatility for each stock. b) Calculate the expected return and the volatility (standard deviation) of a portfolio that is 70% invested in stock A and 30% invested in stock 8, cor the correlation coefficient between the two stocks is 6.27%. c) What is your comments on the results in a and b. TT T Arial 3 (12pt) Wor Pathop ick Save and Submit to save and submit. Click Save All Answers to save all answers. hp