With annual earnings of $32.5 million every year, Durango Data was confident that this amount of profit could be sustained indefinitely if it simply maintained its current portfolio of assets and avoided any new projects. But Durango is approached by a data warehouse technology company with an opportunity for Durango to invest $29 million today; and $45 million one year from now in a new product that requires technical development and regulatory approval. The new investment will generate annual after-tax cash flow of $17 million in perpetuity starting three years from today. Durango has 14.0 million shares outstanding and the required rate of return on the stock is 11%. What would Durango's new stock price ($ per share) be if the Board approves the investment? $21.93 $24.98 $20.26 $25.10 $21.53

With annual earnings of $32.5 million every year, Durango Data was confident that this amount of profit could be sustained indefinitely if it simply maintained its current portfolio of assets and avoided any new projects. But Durango is approached by a data warehouse technology company with an opportunity for Durango to invest $29 million today; and $45 million one year from now in a new product that requires technical development and regulatory approval. The new investment will generate annual after-tax cash flow of $17 million in perpetuity starting three years from today. Durango has 14.0 million shares outstanding and the required rate of return on the stock is 11%. What would Durango's new stock price ($ per share) be if the Board approves the investment? $21.93 $24.98 $20.26 $25.10 $21.53

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

See similar textbooks

Similar questions

Mitchell Company is considering an investment in a new machine. Managers at the company are uncertain about the economic life of the machine, because of the speed of innovation in the technology. The machine requires an investment of $1.60 million. After-tax cash flows are estimated to be $455,711 each year the machine is operating (and not obsolete). The company uses a 14 percent discount rate in evaluating capital investments. Use Exhibit A.9. Required: What is the minimum economic life of the machine (in whole years) that would be required for it to have a positive net present value? Required: What is the minimum economic life of the machine (in whole years) that would be required for it to have a positive net present value?
Grady-White Boats, Inc. is considering a project that will require additional inventory of $1,131,000. In addition, pursuing this project will also increase accounts payable by $400,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $800,000 and are expected to increase by 10% if this project is accepted. The firm's cash requirements are not anticipated to change. What is the incremental change to net working capital as a result of accepting this project? O A. $1,531,000 O B. $1,451,000 C. $811,000 D. $651,000 O E. $1,611,000
Caspian Sea Drinks is considering buying the J - Mix 2000. It will allow them to make and sell more product. The machine cost $1.92 million and create incremental cash flows of $582, 193.00 each year for the next five years. The cost of capital is 9.20 %. What is the profitability index for the J - Mix 2000?
Dynamic is considering investing in a rooftop solar network to generate its own power. Any unused power will be sold back to the local utility company. Between cost savings and new revenues, the company expects to generate $1,560,000 per year in net cash inflows from the solar network installation. The solar network would cost $8.8 million and is expected to have a 18-year useful life with no residual value. Calculate (i) the internal rate of return (IRR) and (ii) the net present value (NPV) assuming the company uses a 12% hurdle rate. (i) Calculate the internal rate of return (IRR). Use technology to find this value. (Enter a percentage rounded to two decimal places, X.XX%.) IRR (as a percentage):
A corporation is considering purchasing a machine that will save $150,000 per year before taxes. The cost of operating the machine (including maintenance) is $30,000 per year. The machine will be needed for five years, after which it will have a zero salvage value. MACRS depreciation will be used, assuming a three-year class life. The marginal income tax rate is 25%. If the firm wants 15% return on investment after taxes, how much can it afford to pay for this machine? If the firm wants 15% return on investment after taxes, it can afford to pay ?.
aa
Wavy Inc is examining a project that requires an initial investment of -10 million today. This will be followed by several years of positive incremental after-tax cash flows. However, during the last year of the project's life Wavy expects that the incremental cash flow will again be negative. By which method should Wavy determine whether or not to invest? A) Both NPV or IRR are fine, as they must arrive at same investment decision B) IRR, because there will be no NPV solution in this case C) Neither NPV or IRR are useful in this situation D) NPV, since this project will have two IRRs
Dynamic is considering investing in a rooftop solar network to generate its own power. Any unused power will be sold back to the local utility company. Between cost savings and new revenues, the company expects to generate $1,460,000 per year in net cash inflows from the solar network installation. The solar network would cost $7.2 million and is expected to have a 18-year useful life with no residual value. Calculate (i) the internal rate of return (IRR) and (ii) the net present value (NPV) assuming the company uses a 13% hurdle rate. (i) Calculate the internal rate of return (IRR). Use technology to find this value. (Enter a percentage rounded to two decimal places, X.XX%.) The IRR is %.
A company is investing in a solar panel system to reduce its electricity costs. The system requires a cash payment of $125,374.60 today. The system is expected to generate net cash flows of $13,000 per year for the next 35 years. The investment has zero salvage value. The company requires an 8% return on its investments. Compute the net present value of this investment.
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $235,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.4 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?
martin development company is deciding whether to proceed with Project X. The cost would be $9 million in year 0, there is a 50% chance that X would be hugely successful and would generate a cash after tax flow of $6 million per year during years 1, 2 and three. however there is a 50% chance that X would be less successful and would generate only $1 million per year for the three years. If Project X is hugely successful it would open the door to another investment project why which would require an outlay of 10 million dollars at the end of year 2. project Y would then be sold to another company at a price of $20 million at the end of year 3 Martins weighted average cost of capital is 11%. A)if the company does not consider real options what is Project X expected NPV? b) What is X is expected NPV with the growth option? c)what is the value of the growth option?
Bha

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS