On Friday, October 19 a headline in The Wall Street Journal read “Treasury’s Rebound as Italy Fears Resurface: Traders bought Treasury’s and German bonds while selling Italian bonds as they sought safer places to put their money.” Briefly explain this headline in relation to Modern Portfolio Theory.
The market value of General Mills equity and debt is $26B and $24B, respectively. The firm’s debt is rated BBB which currently yields 4% after adjusting for corporate taxes. The firm’s beta is 0.63, the risk-free rate 3.2% and the market risk premium is 6%. Use this information to find the weighted average cost of capital for General Mills and explain your answer.
Efficient Market Hypothesis Implication for Managers Research Paper Instructions
This past year General Mills earned operating profit after taxes of $2.6B. Using the firm’s cost of capital you found in the previous question calculate the Economic Value Added for the period and explain your answer.
A new computer system will require an initial outlay of $100,000 and is expected to increase the firm’s cash flows by $37,000 a year for each of the next 4 years. Calculate the net present value of this capital project and find out if the system is worth installing when investors require a 15% rate of return on their capital? What if 20% is required? Explain your answer.
If you insulate your office for $40,000 you will save $6,000 a year in heating expenses. Assuming these savings will last forever, what is the IRR of the investment? Explain the risks of using IRR for this capital budgeting decision.