CFA Level 1: Takeda Company Project NPV Calculation

Takeda Company Project NPV Calculation

Prev Question Next Question

Question

Returns on the market and Takeda Company's stock during the last 3 years are shown below:

YearMarketTakeda -

1995-12%-14%

19962331

19971610

The risk-free rate is 7 percent, and the required return on the market is 12 percent. Takeda is considering a project whose market beta was found by adding 0.2 to the company's overall corporate beta. Takeda finances only with equity, all of which comes from retained earnings. The project has a cost of $100 million, and it is expected to provide cash flows of $20 million per year at the end of Years 1 through 5 and then $30 million per year at the end of Years 6 through 10. What is the project's NPV (in millions of dollars)?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

Explanation

1. Run a regression to find the corporate beta. It is 1.1633.

2. Find the project's estimated beta by adding 0.2 to the corporate beta. The project beta is thus 1.3633.

3. Find the company's cost of equity, which is its WACC because it uses no debt: k(s) = WACC = 7% + (12% - 7%)1.3633 = 13.8165%.

4. Now find NPV (in millions):

CF(0) = -100 -

CF(1-5) = 20 -

CF(6-10) = 30 -

I = 13.82 Solve for NPV = $23.11 million.

Prev Question Next Question