Suppose that Rose Industries is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3%every year thereafter. Rose currently maintains a debt to equity ratio of 1, its marginal tax rate is 40%, its cost of debt rD is 6%,and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. Given that Rose issues new debt of $50 million initially to fund the acquisition, the total value of this acquisition using the APV method is equal to?
A. 100 million. B. 124 million. C. 50 million. D. 170 million.
Which of the following statements is NOT a disadvantage of the regular payback method?
a. Ignores cash flows beyond the payback period.
b. Does not directly account for the time value of money.
c. Does not provide any indication regarding a project's liquidity or risk.
d. Does not take account of differences in size among projects.
e. Lacks an objective, market-determined benchmark for making decisions.
The WACC for two mutually exclusive projects that are being considered is 8%. Project K has an IRR of 20% while Project R's IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?
a. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.
b. You should recommend Project R, because at the new WACC it will have the higher NPV.
c. You should recommend Project K, because at the new WACC it will have thehigher NPV.
d. You should recommend Project K because it has the higher IRR and will continueto have the higher IRR even at the new WACC.
e. You should reject both projects because they will both have negative NPVS under the new conditions.
Projects A and B have identical expected lives and identical initial cash outflows (costs).However, most of one project's cash flows come in the early years, while most of the otherproject's cash flows occur in the later years. The two NPV profiles are given below:
a. More of Project B's cash flows occur in the later years.
b. We must have information on the cost of capital in order to determine which project has the larger early cash flows.
c. The NPV profile graph is inconsistent with the statement made in the problem.
d. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project's IRR.
e. More of Project A's cash flows occur in the later years.
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
a. If Project A has a higher IRR than Project B, then Project A must also have ahigher NPV.
b. The IRR calculation implicitlyassumes that all cash flows are reinvested at the WACC.
c. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
d. If a project has normal cash flows and its IRR exceeds its WACC, then the project's NPV must be positive.ICD1.:.1.IDD
If Project A has a higher IRR than Project B, then Project A must have the lower NPV.е.
Question # 4Which of the following statements is CORRECT? Assume that the project being considered hasnormal cash flows, with one outflow followed by a series of inflows.
a. The higher the WACC used to calculate the NPV, the lower the calculated NPVwill be.
b. If a project's NPV is greater than zero, then its IRR must be less than the WACC.
c. If a project's NPV is greater than zero, then its IRR must be less than zero.
d. The NPVS of relatively risky projects should be found using relatively low WACCS.
e. A project's NPV is generally found by compounding the cash inflows at the WACC to find the terminal value (TV), then discounting the TV at the IRR to find its PV.
Worthington Inc. is considering a project that has the following cash flow data. What is theproject's payback?
Hart Corp. is considering a project that has the following cash flow data. What is the project's IRR?
Ellman Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV?
NFI has identified a major investment opportunity that the board of directors has agreed should be undertaken. The Project Cash Flows will be:
Yr 5 - Income from Operations of £600,000
Yr 1 - Income from Operations of £200,000
Yr 4 – Income from Operations of £1,600,000-
Yr 3 - Income from Operations of £1 600,000
Yr 2 - Income from Operations of £600,000
Yr 0- Investment of £3 Million
A. Using Appendix A identify whether the project is viable using a discount rate of 13% and Tax Rate of 20%. (20 Marks)
B. Critically discuss what the discount rate should be based upon in Capital Investmentdecisions and the reasons why. (5 Marks)
Q7. Charlene has made contributions of $4,900 to her RRSP at the end of every half year for the past seven years. The plan has earned 10.9% compounded semiannually. She has just moved the funds to another plan earning 9.4% compounded quarterly, and will now contribute $3,900 at the end of every three months. What total amount will she have in the plan five years from now?
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