Unformatted text preview: 8-2.
a. Payback on this bond is 25 years. You pay $1,000. You receive $40 a year for 25 years, a total of
b. The bond is not necessarily a bad investment. Payback does not take time value of money into account,
nor does it account for cash flows received after the payback period. It is more appropriate to calculate the
NPV of an investment. Given the risk level of the bond, is 4% a fair return? If the answer is yes, then the
bond may be a good investment.
c. The discounted payback, using a 4% discount rate, is 30 years. This shows that unless the acceptable
payback period is decreased when discounted payback is used, vs. regular payback, then projects which
return money late in the life of the investment are even more disadvantaged under discounted payback
than under regular payback. NPV is a more appropriate method to use to determine the value of an
Cost of Equity = 6% + [1.6(11%-6%)]
Pepsico has a higher operating leverage as per the attached excel sheet
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