CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project. Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available. Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available. The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project. Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available. Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available. The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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CH 6 #4 The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are applied unless there are significant qualitative considerations that justify an exception for a particular project.
- Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if excess funds are available.
- Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally generated funds are not available.
The following table shows the cash flows for a series of independent investments. Use the DEF Company’s criteria to classify each investment as: A = must accept; R = must reject; or U = uncertain.
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e. What is the interest rate the firm would have to pay on a one-year loan, negotiated now, with the funds to be received one year from
now and paid back two years from now? That is, the cash flow from the point of view of the borrower would be as follows:
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Time 2
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Capital Rationing
Amount
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Find r
External capital rationing
4. The DEF Company prefers to finance investments internally to the extent possible. However, it has adopted the following policies, which are
applied unless there are significant qualitative considerations that justify an exception for a particular project.
Internal capital rationing
Internal capital rationing and dividend
policy
a. Investments are not accepted unless they can earn at least 11.1 percent after taxes on a discounted cash flow (DCF) basis, even if
excess funds are available.
b. Investments are not rejected if they will earn 25 percent or more after taxes on a discounted cash flow (DCF) basis, even if internally
generated funds are not available.
Ranking of investments
The following table shows the cash flows for a series of independent investments. Use the DEF Company's criteria to classify each investment
as: A = must accept; R = must reject; or U = uncertain.
Index of present value (or profitability
index)
Investments
Cash flows
Classification
-$4100
$50
$50
$50
E
-100
200
Programming solutions
F
-100
80
50
30
G
-100
30
50
80
Capital rationing and risk
H
-100
10
40
70
Conclusions
Problems
Bibliography
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Bibliography
Bacon, P. W., "The Evaluation of Mutually Exclusive Investments," Financial
Management, Summer 1977, pp. 55-8.
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