Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 13, Problem 8P
Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000. The project will produce 1,000 cases of mineral water per year indefinitely. The current sales price is $138 per case, and the current cost per case is $105. The firm is taxed at a rate of 34%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits, because the spring has an indefinite life and will not be
- a. Should the firm accept the project? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its
NPV .) - b. Suppose that total costs consisted of a fixed cost of $10,000 per year plus variable costs of $95 per unit, and only the variable costs were expected to increase with inflation. Would this make the project better or worse? Continue to assume that the sales price will rise with inflation.
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Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of $165,000. The project will produce 700 cases of mineral water per year indefinitely, starting at Year 1.
The Year-1 sales price will be $150 per case, and the Year-1 cost per case will be $120. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only
equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated.
a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? Do not round intermediate calculations. Round your answers to
the nearest dollar. Negative values, if any, should be indicated by a minus sign.
PV…
Hotel Today Ltd. is thinking of buying a real estate asset. The asset's projected stabilized NOI for the following year is $ 5,400,000 and it is currently selling for $ 65 million based on the market cap rate perception. Hotel Today Ltd. has a required return of 9% on this investment. Based on market forecasts, they have estimated a 1.5% growth per annum. Based on their internal cap rate perception, is it a good buy and why?
FrontLier Company is planning to acquire Stint Corp. The additional
pre-tax income from the acquisition will be $150,000 in the first
year, but it will increase by 5% in future years. Because of
diversification, the beta of FronLier will decrease from 1.20 to 0.9.
Currently the return on the market is 11% and the riskless rate is
6%. What is the maximum price that FrontLier should pay for Stint
Corp? The tax rate of FrontLier is 30%.
O 1,870,000
1,872,500
1,875,000
O 1,909,091
Chapter 13 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 13 - Define each of the following terms:
Project cash...Ch. 13 - Prob. 2QCh. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4QCh. 13 - Prob. 5QCh. 13 - Prob. 6QCh. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8QCh. 13 - Prob. 9QCh. 13 - Distinguish among beta (or market) risk,...
Ch. 13 - Prob. 11QCh. 13 - Talbot Industries is considering launching a new...Ch. 13 - Prob. 2PCh. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Wendys boss wants to use straight-line...Ch. 13 - New-Project Analysis
The Campbell Company is...Ch. 13 - Prob. 7PCh. 13 - Inflation Adjustments
The Rodriguez Company is...Ch. 13 - Prob. 10PCh. 13 - Scenario Analysis Shao Industries is considering a...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Prob. 3MCCh. 13 - Prob. 4MCCh. 13 - Prob. 5MCCh. 13 - Prob. 6MCCh. 13 - Calculate the cash flows for each year. Based on...Ch. 13 - Prob. 8MCCh. 13 - (1) What are the three types of risk that are...Ch. 13 - Prob. 12MCCh. 13 - Prob. 13MCCh. 13 - What is a real option? What are some types of real...
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