ESSENTIAL OF CORP FINANCE W/CONNECT
8th Edition
ISBN: 9781259903175
Author: Ross
Publisher: MCG CUSTOM
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Chapter 1, Problem 1.5C
Who are the stakeholders in a firm?
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The shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here:
Barley
Wheat
Price/earnings ratio
13.5
21
Shares outstanding
90,000
210,000
Earnings
$180,000
$810,000
Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley.
Required
What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0?
What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?
Black Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its extraction business. Management has already determined that acquisition of the system has a positive NPV. The system costs $9.4 million and qualifies for a 25% CCA rate. The equipment will have a $975,000 salvage value in five years. Black Oil’s tax rate is 36%, and the firm can borrow at 9%. Cape Town Company has offered to lease the drilling equipment to Black Oil for payments of $2.15 million per year. Cape Town’s policy is to require its lessees to make payments at the start of the year.
Suppose it is estimated that the equipment will have no savage value at the end of the lease. What is the maximum lease payment acceptable to Black Oil now?
Space Exploration Technology Corporation (Space X), is an aerospace manufacturer that sells stock engine components and tests equipment for commercial space transportation. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.6 million per unit, and the credit price is $1.725 million each. Credit is extended for one period, and based on historical experience, payment for about one out of every 200 such orders is never collected. The required return is 1.8% per period.
Required
Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended.
What is the break-even probability of default in part 1?
Suppose that customers who don’t default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break-even probability of default?
Chapter 1 Solutions
ESSENTIAL OF CORP FINANCE W/CONNECT
Ch. 1.1 - What are the major areas in finance?Ch. 1.1 - Prob. 1.1BCQCh. 1.2 - What is the capital budgeting decision?Ch. 1.2 - What do you call the specific mixture of long-term...Ch. 1.2 - Prob. 1.2CCQCh. 1.3 - Prob. 1.3ACQCh. 1.3 - Prob. 1.3BCQCh. 1.3 - Prob. 1.3CCQCh. 1.3 - Prob. 1.3DCQCh. 1.4 - Prob. 1.4ACQ
Ch. 1.4 - What are some shortcomings of the goal of profit...Ch. 1.5 - Prob. 1.5ACQCh. 1.5 - Prob. 1.5BCQCh. 1.5 - What incentives do managers in large corporations...Ch. 1.6 - What is a dealer market? How do dealer and auction...Ch. 1.6 - Prob. 1.6BCQCh. 1.6 - What does OTC stand for? What is the large OTC...Ch. 1 - Prob. 1.2CCh. 1 - Prob. 1.3CCh. 1 - Prob. 1.4CCh. 1 - Who are the stakeholders in a firm?Ch. 1 - What are the defining features of a primary...Ch. 1 - Prob. 1CTCRCh. 1 - Prob. 2CTCRCh. 1 - Prob. 3CTCRCh. 1 - Prob. 4CTCRCh. 1 - Prob. 5CTCRCh. 1 - Prob. 6CTCRCh. 1 - Primary versus Secondary Markets. Youve probably...Ch. 1 - Auction versus Dealer Markets. What does it mean...Ch. 1 - Prob. 9CTCRCh. 1 - Prob. 10CTCRCh. 1 - Prob. 11CTCRCh. 1 - Prob. 12CTCRCh. 1 - Prob. 13CTCRCh. 1 - Prob. 14CTCRCh. 1 - Prob. 15CTCRCh. 1 - Prob. 1CCCh. 1 - Prob. 2CCCh. 1 - Prob. 3CC
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