Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 19, Problem 8P
Summary Introduction
To determine: The
Introduction:
Free cash flow indicates the amount of cash a firm has after spending on all capital expenditures. Free cash flow to equity indicates the amount available to the equity shareholders of a company after all the expenses.
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Consider the following project:
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The internal rate of return is 17%. The NPV, assuming a 17% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)
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Chapter 19 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 19.1 - Prob. 1CCCh. 19.1 - Prob. 2CCCh. 19.2 - Prob. 1CCCh. 19.2 - Prob. 2CCCh. 19.3 - What is a pro forma income statement?Ch. 19.3 - Prob. 2CCCh. 19.4 - Prob. 1CCCh. 19.4 - Prob. 2CCCh. 19.5 - Prob. 1CCCh. 19.5 - Prob. 2CC
Ch. 19.6 - Prob. 1CCCh. 19.6 - Prob. 2CCCh. 19 - Prob. 1PCh. 19 - Prob. 2PCh. 19 - Prob. 3PCh. 19 - Prob. 4PCh. 19 - Under the assumptions that Idekos market share...Ch. 19 - Prob. 6PCh. 19 - Prob. 7PCh. 19 - Prob. 8PCh. 19 - Prob. 11PCh. 19 - Calculate Idekos unlevered cost of capital when...Ch. 19 - Using the information produced in the income...Ch. 19 - How does the assumption on future improvements in...Ch. 19 - Approximately what expected future long-run growth...Ch. 19 - Prob. 16P
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- Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If gL < WACC, what is a formula for the present value of expected free cash flows when discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate of gL forever (and gL < WACC), what is a formula for the present value of expected free cash flows when discounted at the WACC?arrow_forward6.Calculate the project's Modified Internal Rate of Return (MIRR). What critical assumption does the MIRR make that differentiates it from the IRR? TIP : look for the definition of Modified Internal Rate of Return, and then do it in excel, easy !!! Year Net Cash flow Future Value of Net Cash flow 0 -$20.8 example 1 $4.5 $7.97 (n=6, i=10%)=fv(.1,6,,4.5) 2 $6.3 (n=5, i=10%) 3 $5.2 (n=4, i=10%) 4 $3.9 (n=3, i=10%) 5 $2.1 (n=2, i=10%) 6 $1.3 (n=1, i=10%) 7 $0.5 (n=0, i=10%) Sum = $XX.XX MIRR = ( in excel ) Rate ( 7,-20.8, xx.xx) 7.Where does the value of MIRR fall relative to the discount rate and IRR?arrow_forward18. In a situation such as Acron's, where a one-time cost is followed by a sequence of cash flows, the internal rate of return (IRR) is the discount rate that makes the NPV equal to 0. The idea is that if the discount rate is greater than the IRR, the company will not pursue the project, but if the discount rate is less than the IRR, the project is financially attractive. a. Use Excel's Goal Seek tool to find the IRR for the Acron model. b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron's model. Of course, you should get the same IRR as in part a. c. Verify that the NPV is negative when the discount rate is slightly greater than the IRR, and that it is positive when the discount rate is slightly less thanarrow_forward
- If the present value of the expected net cash flows from a machine, discounted at 10%, exceeds the amount to be invested, what can you say about the investment’s expected rate of return? What can you say about the expected rate of return if the present value of the net cash flows, discountedat 10%, is less than the investment amount?arrow_forwardIn using the two-step approach to Enterprise Valuation (EV), where EV = the Present Value of Planning Period Cash Flows (PVPPCF) + the Present Value of Terminal Value at the end of the Planning Period (PVTV), the PVTV calculation can be based on: a. Level annual cash flows discounted as a perpetuity. b. The Gordon Growth Model. c. An EBITDA multiple. d. All of the above. e. None of the above.arrow_forwardThe present worth of a multiyear investment with all positive cash flows (incomes) other than the initial investment is PW = $11,000 at MARR = i%. If MARR changes to (i+1)%, the present worth will be: O Greater than $11,000. O Cannot determine without the cash flow profile and a value for i. O Less than $11,000. O Equal to $11,000.arrow_forward
- Discuss the effect on Free Cash Flow in each of the following situations. Assume that all other things remain constant. d) Increase in time over which capitalized expenses are depreciated e) Now only 60% of NWC is recoverable when a project winds uparrow_forwardUse available information to forecast incremental earnings what are the NWCs and ∆NWCs and forecast FCFs.arrow_forwardAn investment will provide the following future cash flows. Year 1 6,768 Year 2 = 3,989 Year 3 and 4 = 6,869 Year 5 = 1,797 Using a 9.96% discount rate, what is the present value of this investment?arrow_forward
- Bhupatbhaiarrow_forwardWhat is the NPV of the following cash flows if the required rate of return is 0.09? Year 0 1 2 3 4 CF -6,816 3,577 3,505 2,732 3,757arrow_forwardSolve, a. Calculate the IRR for each of the three cash-flow diagrams that follow. Use EOY zero for (i) and EOY four for (ii) and (iii) as the reference points in time. What can you conclude about “reference year shift” and “proportionality” issues of the IRR method? b. Calculate the PW at MARR=10 % per year at EOY zero for (i) and (ii) and EOY four for (ii) and (iii). How do the IRR and PW methods compare?arrow_forward
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