working in detail

Question 3 Returns on the market and Company Y's stock during the last 3 years are shown below: Year 2002 2003 2004 Market -24% 10 22 Company Y -228 13 36 The risk-free rate is 5 percent, and the required return on the market is 11 percent. You are considering a low-risk project whose market beta is 0.5 less than the company's overall corporate beta. You finance only with equity, all of which comes from retained earnings. The project has a cost of $500 million, and it is expected to provide cash flows of $100 million per year at the end of Years 1 through 5 and then $50 million per year at the end of Years 6 through 10. What is the project's NPV (in millions of dollars)? [10 marks] Question 2 A financial planner at Faisal Bank has offered you three possible options for receiving cash flows. You must choose the option that has the highest present value. Option 1) PKR 1,000 now and another PKR 1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying a 12 percent nominal annual rate, but compounded monthly (to be left on deposit for the year). Option 2) PKR 12,750 at the end of the year (assume a 12 percent nominal interest rate with semiannual compounding). (Option 3) A payment scheme of 8 quarterly payments made over the next two years. The first payment of PKR 800 is to be made at the end of the current quarter. Payments will increase by 20 percent cach quarter. The money is to be deposited in an account paying a 12 percent nominal annual rate, but compounded quarterly to be left on deposit for the entire 2-year period). Which one would you choose? [10 marks]