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[answered] 1. You are considering a safe investment opportunity that r


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1. You are considering a safe investment opportunity that requires a $1, 000

 

Investment today, and will pay $500 two years from now and another $750

 

Five years from now.

 

a. What is the IRR of this investment?

 

b. If you are choosing between this investment and putting your money in a safe bank account

 

that pays an EAR of 5 % per year for any horizon, can you make the decision by simply

 

comparing this EAR with the IRR of the investment? Explain.

 

a. What is the IRR of this investment?

 

The IRR of this investment is

 

%. (Round to two decimal places.)

 

b. If you are choosing between this investment and putting your money in a safe bank account

 

that pays an EAR of 5 % per year for any horizon, can you make the decision by simply

 

comparing this EAR with the IRR of the investment? Explain.

 

(Select the best choice below.)

 

A.

 

Yes, because the EAR is the same at all horizons, so the two "projects" have the same riskiness,

 

scale and timing.

 

B.

 

Yes, you can always compare IRRs of riskless projects, and an investment in the bank is riskless.

 

C.

 

No, this is like comparing the IRRs of two projects.

 

D.

 

No, because the timing of the cash flows are different. 2. You notice that PepsiCo (PEP) has a stock price of $74.83 and EPS of $ 3.35.

 

Its competitor, the Coca-Cola Company (KO), has EPS of $ 2.31.

 

Estimate the value of a share of Coca-Cola stock using only this data.

 

The value of a share of Coca-Cola stock is

 

$

 

(Round to the nearest cent.) 3. Benchmark Metrics Inc. (BMI), an all-equity financed firm, reported EPS of

 

$ 5.88 in 2013. Despite the economic downturn, BMI is confident regarding its current

 

investment opportunities. But due to the financial crisis, BMI does not wish to fund these

 

investments externally. The Board has therefore decided to suspend its stock repurchase plan and

 

cut its dividend to $ 1.01 per share (vs. almost $ 2 per share in 2012), and retain these funds

 

instead. The firm has just paid the 2013 dividend, and BMI plans to keep its dividend at

 

$ 1.01 per share in 2014 as well. In subsequent years, it expects its growth opportunities to slow,

 

and it will still be able to fund its growth internally with a target 38 % dividend payout ratio, and

 

reinitiating its stock repurchase plan for a total payout rate of 58 %. (All dividends and

 

repurchases occur at the end of each year.) Suppose BMI's existing operations will continue to

 

generate the current level of earnings per share in the future. Assume further that the return on

 

new investment is 15 %, and that reinvestments will account for all future earnings growth (if

 

any). Finally, assume BMI's equity cost of capital is 10 %.

 

a. Estimate BMI's EPS in 2014 and 2015 (before any share repurchases).

 

b. What is the value of a share of BMI at the start of 2014 (end of 2013)?

 

Hint: Make sure to round all intermediate calculations to at least four decimal places.

 

a. Estimate BMI's EPS in 2014 and 2015 (before any share repurchases).

 

BMI's EPS in 2014 is

 

$

 

(Round to the nearest cent.)

 

BMI's EPS in 2015 is

 

$

 

(Round to the nearest cent.)

 

b. What is the value of a share of BMI at the start of 2014 (end of 2013)?

 

The value of a share of BMI at the start of 2014 is

 

$

 

(Round to the nearest cent.)

 


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