Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else. Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%. Here are the net cash flows (in thousand $) To determine: The definition of internal rate of return and the IRR of each franchise’s.

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Answer 1

Question

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

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You've collected the following information from your favorite financial website. 52-Week Price Dividend Hi 77.40 Lo Stock (Dividend) Yield % PE Ratio Close Price Net Change 10.43 Acevedo .36 2.6 6 13.90 -.24 55.81 33.42 Georgette, Incorporated 1.54 3.8 10 40.43 -.01 131.04 70.05 YBM 2.55 2.9 10 89.08 3.07 50.24 35.00 13.95 Manta Energy .80 5.2 6 20.74 Winter Sports .32 1.5 28 15.43 ?? -.26 .18 According to analysts, the growth rate in dividends for YBM for the next five years is expected to be 21 percent. Suppose YBM meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.75 percent, indefinitely. Assume investors require a return of 14 percent on YBM stock. According to the dividend growth model, what should the stock price be today? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 2

Question

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

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Answer 3

Question

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

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Answer 4

Question

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

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Answer 5

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

Answer 6

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

Answer 7

Chapter 12, Problem 4MC

a)

Summary Introduction

Case summary:

Person X is graduated from large university. He desired to become an entrepreneur. After death of his grandfather he got a business worth of $1million. Then he decided to buy minimum one franchise in the area of fast foods.an issue behind is that he will sell off investment after 3 years and go on to something else.

Person X has two alternatives franchise L and franchise S. Franchise L providing breakfast and lunch while franchise S is providing only dinner. Person X made evaluation of each franchise and find out that both have characteristics of risk and needs rate of return of 10%.

Here are the net cash flows (in thousand $)

To determine: The definition of internal rate of return and the IRR of each franchise’s.

Answer 8

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

Answer 9

b)

Summary Introduction

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

Answer 10

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

Answer 11

c)

Summary Introduction

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

Answer 12

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

Answer 13

d)

Summary Introduction

To determine: Whether IRR changes with respect to change in cost of capital.

Answer 14

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Ch. 12 - What types of projects require the least detailed...Ch. 12 - Prob. 3Q Ch. 12 - Prob. 4Q Ch. 12 - Prob. 5Q Ch. 12 - A project has an initial cost of 40,000, expected...Ch. 12 - IRR Refer to Problem 12-1. What is the projects...Ch. 12 - Prob. 3P Ch. 12 - Prob. 4P Ch. 12 - Prob. 5P Ch. 12 - Prob. 6P

Solution Summary: The author analyzes the internal rate of return and the IRR of each franchise.

To determine: The relationship between IRR and YTM and IRR if equal cash inflow of $40.

To determine: The logic behind the IRR method and the franchises must be accepted if they are independent and equally exclusive.

To determine: Whether IRR changes with respect to change in cost of capital.

Chapter 12 Solutions