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a.
To calculate: The discount rate of Robinson Corporation.
Introduction:
Discount Rate:
A rate that is used for the calculation of the
a.
Answer to Problem 18P
The discount rate of Robinson Corporation is 7.53% and after rounding off to a whole number, the discount rate is 8%.
Explanation of Solution
Computation of the discount rate:
b.
To calculate: The PV of total outflows of Robinson Corporation.
Introduction:
Present value (PV):
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the
b.
Answer to Problem 18P
The PV of total outflows of Robinson Corporation is $3,171,831.
Explanation of Solution
Computation of PV of total outflows:
Working Notes:
Calculation of net cost of underwriting expense on new issue:
Calculation of after-tax cost:
The calculation of the tax savings per year is as follows:
The calculation of current price of bond, that is, PV of future tax savings is shown below.
The formula used for the calculation of current price of bond, that is, PV of future tax savings is shown below.
c.
To calculate: The PV of total inflows of Robinson Corporation.
Introduction:
Present value:
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.
c.
Answer to Problem 18P
The present value of total inflow of Robinson Corporation is $2,847,244.
Explanation of Solution
Calculation of the present value of total inflow:
Working Notes:
The calculation of the savings per year is as follows:
The calculation of PV of savings is shown below.
The formula used for the calculation of PV of savings is shown below.
Calculation of underwriting cost write off:
Calculation of PV of deferred future write off:
The calculation of current price of bond is shown below.
The formula used for the calculation of current price of bond is shown below.
d.
To calculate: The NPV of Robinson Corporation.
Introduction:
It is the difference between the PV (present value) of
d.
Answer to Problem 18P
The NPV of Robinson Corporation is ($324,478).
Explanation of Solution
Calculation of NPV:
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Chapter 16 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
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- Alpha Corporation consists of two divisions, X and Y. Division X is riskier than Division Y. If Alpha Corporation uses the firm's overall weighted average cost of capital to evaluate both divisions' projects, which division(s) will tend to be awarded greater funds for investment? Multiple choice question. Only division X Neither division Both divisions Only division Yarrow_forwardAlpha Corporation consists of two divisions, X and Y. Division X is riskier than Division Y. If Alpha Corporation uses the firm's overall weighted average cost of capital to evaluate both divisions' projects, which division(s) will tend to be awarded greater funds for investment? Multiple choice question. Only division X Neither division Both divisions Only division Yarrow_forwardWhich of the following is true of the dividends paid to common stockholders? Multiple choice question. All companies are legally required to pay dividends when they earn a net income. All companies are legally required to pay fixed dividends regardless of their financial performance. Dividends paid are not tax deductible. Unlike interest payments, dividends paid are tax-deductible at the corporate level and are tax-free at the personal level.arrow_forward
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- The discount rate for firm's projects equals the cost of capital for the firm as a whole when Blank______. Multiple choice question. all projects have the same risk as the firm the average risk of the firm's projects is constant all projects have normally distributed returnsarrow_forwardTrue or false: The basic assumption of using weighted average cost of capital (WACC) to discount a project is that the capital has been raised in optimal proportions. True false question. True Falsearrow_forwardThe economic value added (EVA) is a performance measure based on the Blank______. Multiple choice question. risk-free rate weighted average cost of capital cost of equity expected returnarrow_forward
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT