Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently asupplier for Orca and the acquisition would allow Orca to better control its materialsupply. The current cash flow from assets for Shark is $6.8 million. The cash flows areexpected to grow at 5 percent for the next five years before leveling off to 2 percent forthe indefinite future. The costs of capital for Orca and Shark are 9 percent and 7 percent,respectively. Shark currently has 3 million shares of stock outstanding and $25 million indebt outstanding.What is the maximum price per share Orca should pay for Shark? (Do not roundintermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)Price per share

Let's proceed with the calculations:Year 1:Cash Flow = $6.8 million * (1 + 0.05) = $7.14 millionYear…

Answered: Orca Industries is considering the…

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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Management of Braden Boats, Inc. is considering an expansion in the firm’s product line that requires the purchase of an additional $162,000 in equipment with installation costs of $19,000 and removal expenses of $2,000 (Note: the removal expenses are considered terminal cash flows and not associated with the installation of the new equipment). The equipment and installation costs will be depreciated over five years using straight-line depreciation. The expansion is expected to increase earnings before depreciation and taxes as follows: Years 1 and 2 Years 3 and 4 Year 5 $ 80,000 $ 60,000 $ 50,000 The firm’s income tax rate is 30 percent and the weighted-average cost of capital is 18 percent. Based on the net present value method of capital budgeting, should management undertake this project? Use Appendix B to answer the question. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar. NPV: $ The firm make the investment.
Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca, and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $6.4 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Orca and Shark is 13 percent and 11 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Orca should pay for Shark? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16, Price per share $ 45 47
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National Cruise Line, Inc. is considering the acquisition of a new ship that will cost 600,000,000. In this regard, the president of the company asked the CFO to analyze cash flows associated with operating the ship under two alternative itineraries: Itinerary 1, Caribbean Winter/Alaska Summer and Itinerary 2, Caribbean Winter/Eastern Canada Summer. The CFO estimated the following cash flows, which are expected to apply to each of the next 15 years:
Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $697,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $192,000 at the end of the project. The project requires $62,000 initially for net working capital, which will be recovered at the end of the project. The operating cash flow will be $187,600 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 21 percent? Multiple Choice -$19,132 -$3,975 -$16,142 -$22,893 -$21,257
J.B. Enterprises is considering the purchase of new equipment with a cost of $1,000,000. If the equipment is purchased, the incremental net cash flows are expected to be $300,000 per year for five years. These net cash flows already reflect the of the equipment and the company’s 40% tax rate. However, there are liability risks associated with the use of this product. The board of directors estimates a “cost of worry” of $25,000 per year. Calculate the net present value of this project incorporating the cost of worry if the company’s cost of capital is 10%. a. $42,466 b. $340,909 c. $375,000 d. $61,420
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Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.32 million. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1.735 million in annual sales, with costs of $650,000. The project requires an initial investment in net working capital of $250,000, and the fixed asset will have a market value of $180,000 at the end of the project. The tax rate is 21 percent. a. What is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) b. If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
Brett Collins is reviewing his company's investment in a cement plant. The company paid $16,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Expected Actual Year 1 $3,310,000 2,600,000 Required Year 2 $5,090,000 2,980,000 Year 3 $4,560,000 4,860,000 Year 4 $5,090,000 3,810,000 Year 5 $4,290,000 3,540,000 a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. Note: Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to the nearest whole dollar.

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