Aardvark Software Incorporated can purchase all the stock of Zebra Computer Services for $1.200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should Multiple Choice not purchase Zebra Computer Services O purchase Zebra Computer Services. purchase Zebra only if Aardvark's cost of capital is between 5% and 10% purchase Zebra only if Aardvark's cost of capital is above 10%

Aardvark Software Incorporated can purchase all the stock of Zebra Computer Services for $1.200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the facts provided, Aardvark should Multiple Choice not purchase Zebra Computer Services O purchase Zebra Computer Services. purchase Zebra only if Aardvark's cost of capital is between 5% and 10% purchase Zebra only if Aardvark's cost of capital is above 10%

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 9E: Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required:...

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Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. Determine the value of the firm. (15) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000?
Acme is looking to acquire Pinder Co now. Acme is expected to generate annual cash flows of $15,000,000 in perpetuity and Pinder is expected to generate annual cash flows of $6,000,000 in perpetuity. The discount rate for both Acme and Pinder is 8%. If Acme acquires Pinder, Acme expects to be able to reduce operating costs by $4,500,000 for the first five years. However, Acme will also incur integration costs of $3,000,000 in the first year. All cash flows occur at the end of the year. To encourage investment into electric bicycles, the government is offering Acme an option to abandon its operations and sell all related assets for $1 million at the end of year 4. If Acme chooses the option to sell all related assets to the government, it will not receive the cash flows generated from the electric bicycle business in that year. What is the value of this option? Answer based only on the information provided.
J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,800,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Cash inflow (aftertax) Synergistic benefits (aftertax) Net present value b. Should the merger be undertaken? The cost of capital for the acquiring firm is 11 percent. a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Yes 1-5 $620,000 58,000 O No Years 6-15 $780,000 78,000 16-20 $980,000 88,000
Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,800, $10,800, and $17,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
John decided to purchase a firm which is expected to generate net cash flows of $5,000 one year from now, $2,000 at the end of each of the next five years and a $10,000 in seven years from now. Investments of similar characteristics and risk in the market have a discount rate of 10%. (a) Determine the value of the firm. (b) What is the incremental value (NPV) of this acquisition if the initial investment made by John is $12,000? (15) (10) Note: Show your answers in tables and all calculations properly presented.
EuropCar Rental is considering two alternatives for the financing of a purchase of a fleet of cars. These two alternatives are: Issue 60,000 shares of common stock at $45 per share. Issue 12%, 10-year bonds at face value for $2,500,000. It is estimated that the company will earn $750,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 shares of common stock outstanding prior to the new financing. Instructions Determine the eﬀect on net income and earnings per share for these two methods of financing.
3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of anew warehouse facility. You have determined the market value of the firm's capital structure as follows:Source of Capital Market ValueBonds $600,000Preferred Stock $150,000Common Stock $450,000To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs forissuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is$3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continuegrowing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividendscurrently equal the net income so there is no internal equity…
ABC firm has the opportunity to make an investment that costs $1.000,000. If ABC makes this investment now, it will earn $200,000, $400,000, 250,000 and $ 500,000 next years from today, respectively. Investment has $200.000 scrap value. The appropriate discount rate for this investment is 13 percent and tax rate is % 40. Should ABC firm invest the money?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Patz Corporation is considering the purchase of a computer-aided manufacturing system. The cash benefits will be 800,000 per year. The system costs 4,000,000 and will last eight years. Compute the NPV assuming a discount rate of 10 percent. Should the company buy the new system? 2. Sterling Wetzel has just invested 270,000 in a restaurant specializing in German food. He expects to receive 43,470 per year for the next eight years. His cost of capital is 5.5 percent. Compute the internal rate of return. Did Sterling make a good decision?
FrontLier Company is planning to acquire Stint Corp. The additional pre-tax income from the acquisition will be $150,000 in the first year, but it will increase by 5% in future years. Because of diversification, the beta of FronLier will decrease from 1.20 to 0.9. Currently the return on the market is 11% and the riskless rate is 6%. What is the maximum price that FrontLier should pay for Stint Corp? The tax rate of FrontLier is 30%. O 1,870,000 1,872,500 1,875,000 O 1,909,091