Lithium, Inc is considering two mutually exclusive projects, A and B. Project A costs 95,000 and is
expected to generate 65,000 in year one and 75,000 in year two.
Project B costs 120,000 and is
expected to generate 64,000 in year one, 67,000 in year two, 56,000 in year three, and 45,000 in
year four. The firm's required rate of return for these projects is 10. The net present value for
Project A is
A) 26,074. B) 16,947. C) 12,358. D) 19,458.
Question 2
NewLinePhone Corp is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32. The
risk-free rate of return is 3 and the market risk premium is 8. NewLinePhone's marginal tax rate is 35.
Use
the capital asset pricing model to estimate NewLinePhone's cost of retained earnings.