Residual Distribution PolicyprojectsHarris Company must set its investmentand dividend policies for the comingyear. It has three independentfrom which to choose, each of whichrequires a $4 million investment. Theseprojects have different levels of risk, andtherefore different costs of capital. Theirprojected IRRs and costs of capital areas follows:Cost ofcapital =Cost ofcapitalCost ofcapital =Harris intends to maintain its 45% debtand 55% common equity capitalstructure, and its net income is expectedto be $6,500,000. If Harris maintains itsresidual dividend policy (with alldistributions in the form of dividends),what will its payout ratio be? Round youranswer to two decimal places.Project A:Project B:Project C:%18%;=13%;9%;IRR 17%=IRR 11%=IRR 10%=

Given: Particulars Amount Cost of capital $4,000,000 Project Cost of capital Internal…

projects Harris Company must set its investment and dividend policies for the coming year. It has three independent from which to choose, each of which requires a $4 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are

projects Harris Company must set its investment and dividend policies for the coming year. It has three independent from which to choose, each of which requires a $4 million investment. These projects have different levels of risk, and therefore different costs of capital. Their projected IRRs and costs of capital are

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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Salsa Company is considering an investment in technology to improve its operations. The investment costs $241,000 and will yield the following net cash flows. Management requires a 10% return on investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Year Net cash Flow 1 $ 48, 200 2 53,900 3 76, 400 4 95,500 5 126,500 Required: Determine the payback period for this investment. Determine the break - even time for this investment. Determine the net present value for this investment. Should management invest in this project based on net present value?
Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial investment of $228,000 and would yield the following annual cash flows. 1. Assuming that the company requires a 12% return from its investments, use net present value to determine which projects, if any, should be acquired. 2. Using the answer from part 1, is the internal rate of return higher or lower than 12% for Project C2?
Walsh Company is considering three independent projects, each of which requires a $5 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here: Project H (high risk): Project M (medium risk): Cost of capital = 15% Cost of capital = 13% Project L (low risk): Cost of capital = 7% IRR = 8% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 35% debt and 65% common equity, and it expects to have net income of $11,329,500. If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places. % IRR = 22% IRR = 12%
The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider the case of Blue Llama Mining Company: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Llama Mining Company’s WACC is 9%, and project Sigma has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 Year 4 $450,000 Which of the following is the correct…
7. Fiftycent Inc., has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the following table. Calculate the NPV and the annualized net present value (ANPV) in order to copy for each project using the firm's cost of capital of 9.0%. Which project would you recommend? (Click on the icon here the contents of the data table below into a spreadsheet.) Initial Investment Year 1 2 456 A WN 3 4 7 Project S $42,000 The NPV for project S is $ The NPV for project T is $ The ANPV for project S is $ The ANPV for project T is $ Which project would you recommend? The firm should choose project (1) - (1) OS OT $17,750 24,600 36,800 - Cash Inflows Project T $67,500 $26,400 22,600 37,000 19,700 10,900 15,350 9,780 (Round to the nearest cent.) (Round to the nearest cent.) 203 005 (Round to the nearest cent.) (Round to the nearest cent.) (Select from the drop-down menu.) bau bao otis…
The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 7%, and project Delta has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $400,000 Year 4 $425,000 Q1. Which of the following is the correct calculation of project Delta’s…
(Capital rationing) The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $11 million. The projects are independent and have the costs and profitability indexes associated with them shown in the popup window: a. Under strict capital rationing, which projects should be selected? b. What problems are there with capital rationing? MCKEN a. Under strict capital rationing, which projects should be selected? (Select the best choice below.) OA. Projects C and F B. Projects D and G OC. Projects C and D OD. Projects D, F and OE. Projects C, D and G Data table (Click on the following icon in order to copy its contents into a spreadsheet.) PROFITABILITY INDEX COST $3,000,000 1.15 2,000,000 1.06 1.34 1.36 6,000,000 5,000,000 3,000,000 6,000,000 1.16 1.25 4,000,000 1.12 PROJECT A ABCDEFG C Bool 1 X Question Viewer
The Caffeine Coffee Company uses the modified internal rate of return. The firm has a cost of capital of 11 percent. The project being analyzed is as follows ($26.000 investment): Use Appendix A and Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Year Cash Flow $ 12,000 11,000 9,000 What is the modified internal rate of return? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Internal rate of return 11.45%
Ryan Corporation is considering three investment projects: X, Y, and Z. Project X would require an investment of $20,000, Project Y of $69,000, and Project Z of $83,000. No other cash outflows would be involved. The present value of the cash inflows would be $23,200 for Project X, $77,970 for Project Y, and $94,620 for Project Z. Rank the projects according to the profitability index from most profitable to least profitable. (Ignore income taxes.) (A) Z, X, Y B) X,Z,Y C) Y, X, Z D) Z, Y, X
Put answer in table format Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $560,000 and has a present value of cash flows of $2,200,000.0. Project 2 requires an initial investment of $5,000,000 and has a present value of cash flows of $7,000,000. 1. Compute the profitability index for each project.2. Based on the profitability index, which project should the company prefer?
The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions. Consider the case of Cute Camel Woodcraft Company: Last Tuesday, Cute Camel Woodcraft Company lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Lambda is 13.8%, but he can’t recall how much Cute Camel originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Lambda. They are: Year Cash Flow Year 1 $1,600,000 Year 2 $3,000,000 Year 3 $3,000,000 Year 4 $3,000,000 The CFO has asked you to compute Project Lambda’s initial investment using the information currently available to you. He has offered the following suggestions and observations: • A…
Five engineering projects are being considered for the upcoming capital budget period. The interrelationships among the projects and the estimated net cash flows of the projects are summarized in the following table: Projects B1 and B2 are mutually exclusive. Projects C1 and C2 are mutually exclusive and dependent on the acceptance of B2. Finally, project D is dependent on the acceptance of C1. Using the PW method, and assuming that MARR = 10% per year, determine which combination (portfolio) of projects is best if the availability of capital is limited to $48,000.

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