Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefirs over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic resulrs. a. Determine the range for the rate of return for each of the two cameras. b. Determine the expected value of return for each camera. c. Purchase of which camera is riskier? Why? Portfolio return and standard deviation Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and srock M will account for the other 60%. The expected returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table. Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefirs over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic resulrs. a. Determine the range for the rate of return for each of the two cameras. b. Determine the expected value of return for each camera. c. Purchase of which camera is riskier? Why? Portfolio return and standard deviation Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and srock M will account for the other 60%. The expected returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table. Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those carnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 40%. a. If the market price of the common stock is $40 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $7.00 per share, what is the company's cost of new common stock financing? c. The company can issue $2.00 dividend preferrexl stock for a market price of $25.00 per share. Flotation costs would amount to $3,00 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 10% coupon, 5 -year bonds that can be sold for $1,200 each. Flotation costs would amount to $25,00 per bond. Use the estimation formula to figure the approximate cost of debt financing, e. What is the WACC? All techniques, conflicting rankings Nicholson Roofing Materials, Inc., is considering two mutually exclusive projects, each with an initial investment of $150,000. The company's board of directors has set a maximum 4-year payback requirement and has set its cost of capital at 9%. The cash inflows associated with the two projects are shown in the following table. a. Calculate the payback period for each project. b. Calculate the NPV of each project at 0%. c. Calculate the NPV of each project at 9%. d. Derive the IRR of each project. e. Rank the projects by each of the techniques used. Make and justify a recommendation
