## (Solved) 6. Required: What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?

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6. Required: What is a sunk cost? Should it be included in the incremental cash flows for a
project? Why or why not? (4 marks)
7. Consider the following realized annual returns:
Market
Realized
Return Microsoft
Realized
Return 1996 21.2% 88.3% 1997 30.3% 56.4% 1998 22.3% 114.6% 1999 25.3% 68.4% 2000 -11.0% -62.8% 2001 -11.3% 52.7% 2002 -20.8% -22.0% 2003 33.1% 6.9% 2004 13.0% 9.2% 2005 7.3% -0.9% Year End Required: Using the data provided in the table, calculate the average annual return, the variance
of the annual returns, and the standard deviation of the average returns for the market from 1996
to 2005. (4 marks)
8. Consider the following returns:
Year End Lowes
Realized Home
Depot IBM
Realized 2000
2001
2002
2003
2004
2005 Return
20.1%
72.7%
-25.7%
56.9%
6.7%
17.9% Realized
Return
-14.6%
4.3%
-58.1%
71.1%
17.3%
0.9% Return
0.2%
-3.2%
-27.0%
27.9%
-5.1%
-11.3% Required: Calculate the variance on a portfolio that is made up of equal investments in Home
Depot and IBM stock. (6 marks)
9. The Aardvark Corporation is considering launching a new product and is trying to determine
an appropriate discount rate for evaluating this new product. Aardvark has identified the
following information for three single division firms that offer products similar to the one
Aardvark is interested in launching: Comparable Firm
Anteater Enterprises
Antelope Inc. Equity
Cost of Debt Cost Debt-to-Value
Capital of Capital
Ratio
12.50%
6.50%
50%
13%
6.10%
40%
14%
7.10%
60% Required: Based upon the three comparable firms, calculate the most appropriate unlevered cost
of capital for Aardvark to use on this new product. (4 marks)
10. Consider a project with free cash flows in one year of \$90,000 in a weak economy or
\$117,000 in a strong economy, with each outcome being equally likely. The initial investment
required for the project is \$80,000, and the project's cost of capital is 15%. The risk-free interest
rate is 5%.
Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of \$50 billion,
and a beta of 2.0. Included in Sisyphean's assets are \$12 billion in cash and risk-free securities.
Required: Calculate Sisyphean's enterprise value and unlevered beta considering the fact that
Sisyphean's cash is risk-free. (4 marks)

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