Consider a project with free cash flows in one year of $90 000 in a weak economy or $117 000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $40 000, and the project's cost of capital is 15.9%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: a. $49301 b. $89301 c. $83500 Od. $69301

Consider a project with free cash flows in one year of $90 000 in a weak economy or $117 000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $40 000, and the project's cost of capital is 15.9%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: a. $49301 b. $89301 c. $83500 Od. $69301

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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Suppose there are two potential projects for investment. Project 1 has a certain payoff of $50 in one year, while project 2 has a 50% chance of generating $100 in one year, and another 50% chance of generating $0 in one year. Suppose the company has an outstanding debt = $50. (1)Which project will shareholders prefer? Justify your answer. (2)Which project will debt holders prefer? Justify your answer. (3)Which project will the financial manager prefer? Justify your answer.
Lible, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)
Project A has an internal rate of return of 10%. Project B costs £100 this year and will generate a cash flow of £105 next year. The two projects are not mutually exclusive. 1. The company should only undertake project A 2. If the appropriate discount rate is below 10%, the company should invest in both projects 3. If the appropriate discount rate is above 5% the company should invest in both projects 4. If the appropriate discount rate is above 5%, the company should not undertake project B
WACC and NPV Pink, Inc., is considering a project that will result in initial aftertax cash savings of $1.82 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt-equity ratio of .85, a cost of equity of 12.2 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual projects the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project?
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow -$238,000 $66,100 $84,300 $141,300 $122,300 $81,500 Use the discounted payback decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Discounted payback Should it be accepted or rejected? O Rejected O Accepted years
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,100 $1,000 $2,200 $1,400 $1,400 $1,200 $1,000 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistic for the project are two and two and a half years, respectively. Time 0 1 2 3 4 5 Cash Flow −125,000 65,000 78,000 105,000 105,000 25,000 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
Grey Fox Aviation Company is analyzing a project that requires an initial investment of $450,000. The project’s expected cash flows are: Year Cash Flow Year 1 $300,000 Year 2 –175,000 Year 3 475,000 Year 4 450,000 Grey Fox Aviation Company’s WACC is 10%, and the project has the same risk as the firm’s average project. Calculate this project’s modified internal rate of return (MIRR): 26.73% 27.89% 20.92% 23.24% If Grey Fox Aviation Company’s managers select projects based on the MIRR criterion, they should this independent project. Which of the following statements best describes the difference between the IRR method and the MIRR method? The IRR method uses only cash inflows to calculate the IRR. The MIRR method uses both cash inflows and cash outflows to calculate the MIRR. The IRR method assumes that cash flows are reinvested at a rate of return equal to the IRR. The MIRR method assumes that cash flows…
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 12 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: 0 1 2 3 4 5 Cash flow: −$362,000 $65,300 $83,500 $140,500 $121,500 $80,700 Use the PI decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.7 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .56, a cost of equity of 13.1 percent, and an aftertax cost of debt of 5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
Consider a project with free cash flows in one year of $130,000 in a weak market or $180,000 in a strong market, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project's unlevered cost of capital is 20%. The risk-free interest rate is 10%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way that is, what is the initial market value of the unlevered equity? c. Suppose the initial $100,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM? Assume that the risk-free rate remains at its…
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: Cash flow: 0 1 2 4 5 -$4,700 $ 1,130 $ 2,330 $ 1,530 $1,530 $ 1,330 Use the discounted payback decision rule to evaluate this project. Note: Round your answer to 2 decimal places. Discounted payback Should it be accepted or rejected? (Click to select) ✓ years 6 $ 1,130

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