EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 18, Problem 10P
Consider Alcatel-Lucent’s project in Problem 6.
- a. What is Alcatel-Lucent’s unlevered cost of capital?
- b. What is the unlevered value of the project?
- c. What are the interest tax shields from the project? What is their
present value ? - d. Show that the APV of Alcatel-Lucent’s project matches the value computed using the WACC method.
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Consider the relationship between a project’s net present value (NPV), its internal rate of return (IRR), and a company’s cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example.
Which of the following statements is CORRECT?
a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
b. An NPV profile graph shows how a project's payback varies as the cost of capital changes.
O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.
Which of the following statements is most correct?
If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s net present value (NPV) must be positive.
If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
Answers a and c are correct.
None of the answers above are correct.
Chapter 18 Solutions
EBK CORPORATE FINANCE
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- We should accept a project if the Net Present Value is positive and the Internal Rate of Return is higher than the cost of capital. What are the reasons for that, what this means?arrow_forwardPLEASE ANSWER ASAP.....arrow_forwardInternal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable.arrow_forward
- Which of the following statements is most correct? If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s profitability index must be positive. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the IRR. Group of answer choices Only statements I and II are incorrect. None of the statements above is incorrect. Only statement II is correct. Only statement I is correct. Only statement III is incorrect.arrow_forwardWhat do we call the cost of capital at which the two projects have the same NPV?arrow_forwardWhich of the following statements is CORRECT? a. An NPV profile graph shows how a project's payback varies as the cost of capital changes. b. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. c. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. d. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV. Provide explanation for the choicearrow_forward
- In a few sentences, answer the following question as completely as you can. What is a sunk cost?Why is it important to understand this concept when analyzing capital projects?arrow_forwardWhat is capital budgeting? Compare the advantages and disadvantages of various capital budgeting techniques. Do you think NPV is the best decision criterion and it can overcome the problems inherent in other methods? Justify your answer.arrow_forwardWhich of the following statements is CORRECT? a. If a project with normal cash flows has an IRR greater than the cost of capital, the project must also have a positive NPV. b. If a project with normal cash flows has an IRR less than the cost of capital, the project must have a positive NPV. c. If the NPV is negative, the IRR must also be negative. d. A project's MIRR can never exceed its IRR. e. If Project A's IRR exceeds Project B's, then A must have the higher NPV.arrow_forward
- An NPV profile plots a project’s NPV at various costs of capital, labeled "A" and "B" in the graph. A project’s NPV profile is shown as follows. Identify the range of costs (ranges labeled "A" and "B") of capital that a firm would use to accept and reject this project. A accept or reject B accept or reject The point at which the NPV profile intersects the horizontal axis represents the .arrow_forwardWhy would the average rate of return differ from the internal rate of return on the same project?arrow_forwardThe relationship between NPV and IRR is such thata. both approaches always provide the same ranking of alternative investment projects.b. the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0.c. if the NPV of a project is negative, the IRR must be greater than the cost of capital.d. none of the abovearrow_forward
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