Is Part A as simple as accepting the individual projects with an expected return greater than 15%?

For Part B, would you use the Expected Stock Return formula and accept projects greater than 15%? For example, project #1, r = 8 + 0.5(7) = 11.5%, so do not accept this project? For project #2, 8+0.8(7) = 13.6, don't accept?

 

I thought we were supposed to use rf + B(rm-rf)?  It looks like you are just using rf + B(rm)? 

Also for part A on Excercise 8.2 where does the yeild to maturity come in?  Maybe I am reading the problem wrong, but don't I use the annuity formula on page 39:

C= 6million, r=0.08, and t=7??  Or of I just take the sum of (6million/1.08 + 6million/1.08^2, etc for the 7 years) and then use r=.10 in the annuity formula?

I thought the market risk premium was = r_m - r_f , which is the return on the market - risk free rate. The information given doesn't say what the return on the market is, so I assumed we had to just use the market risk premium. This is why I used just the 7%. Let me know what numbers you are using for that part of your formula.

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On 8.2, I used the discount factors to find the present value of the firm's debt.

7 payment of 480,000, with an additional 6,000,000 at the end of the 7 years. I used the 10% to compute the present value.

480/1.10 + 480/1.10² + 480/1.10³ + 480/1.10⁴ + 480/1.10⁵ + 480/1.10⁶ + 6480/1.10⁷

I am not for sure if this is correct, but that is how I interpreted the instructions.

[NEAS: Correct.  We use the coupon rate to get the dollars of debt payment.  We use the yield to maturity to dsicount the future cash flows to get the market value.]

 

I did 8.1 part B a little differently.

I still used the Expected Stock Return Formula (for project 1 r=8+.5(7)=11.5%), but I took this return to be the opportunity cost of capital for the project.  With an expected return of 12% for project 1 we would accept, since it is greater than 11.5%

um... any one can help me?

I find that the Ex8.2....
the A should be $5,415,789.742
B should be $ 451,315.812 ?,if the Par value =500,000 ;
Or B should be $21,663,158.97 ?,if the Par value =500,000 X $48 =24,000,000

C should be $5,415,789.742 (1.4)/(5,415,789.742 +451,315.812)+ 451,315.812(.1)/ (451,315.812 + 5,415,789.742 ) =1.3?

Or C should be $5,415,789.742 (1.4)/(5,415,789.742 + $21,663,158.97) +
$21,663,158.97(.1)/ ($21,663,158.97 + 5,415,789.742) = .36?

ming

8.2.
A) agree
B) $24MM
C) use the weighed average
Beta_asset = D/V*Beta_debt + E/V*Beta_equity
Should get 1.16

Where D is the market value of debt (from A)
E is market value ofe equity (part B)
V = D+E

[NEAS: Correct.  The beta of assets is the market value weighted average of the betas of debt and equity.]

For part A, I said to accept projects with returns over 15%. For part B, (and I'm not 100% sure this is right), I accepted projects that had higher returns calculated with their own beta than what was calculated with the company's beta. I agree that the question is a little vague, so I'm unsure if my reasoning is correct.

I think Hikingrl's way may be right. Additionally, as project #1 being accepted but it's return rate is small than the company's opportunity cost of capital 15%, I think we should reject project#1 and accept project #3 as the final answer.

For question 1(B), do we need to answer "Why is the firm's own risk adjusted capitalization rate not the relevent criterion?)

I don't think we need to answer that part.  Since it's in parentheses, I think it's just there to give us a hint at how to do the homework question.

[NEAS: Correct; that is a hint, not a homework question.]