EBK FUNDAMENTALS OF CORPORATE FINANCE
EBK FUNDAMENTALS OF CORPORATE FINANCE
3rd Edition
ISBN: 9780133762808
Author: Harford
Publisher: PEARSON CUSTOM PUB.(CONSIGNMENT)
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Chapter 23, Problem 7CC
Summary Introduction

International integrated market:

An international market can be referred to as an activity of buying or selling goods and services across all the countries of the world. When an investor has the liberty to exchange any amount of any currency at the spot or forward rates and also has the authority to purchase or sell any security in any amount in any country at its current market prices such an international capital market is an integrated market.

Net Present Value:

Net present value (NPV) can be defined as the difference between the present value of cash inflows and the present value of cash outflows. Net present value is used in the process of capital budgeting for analyzing the profitability of a projected investment or project. The formula used to calculate NPV is shown below:

EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  1

Where,

  • EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  2 is the net cash inflow during the period EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  3
  • EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  4 is the initial investment cost
  • EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  5 is the discount rate
  • EBK FUNDAMENTALS OF CORPORATE FINANCE, Chapter 23, Problem 7CC , additional homework tip  6 is the total time period

To determine:

Two methods used to calculate the NPV of a foreign project.

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Assume that the following statements of financial position are stated and a book value.  Alpha Corporation  Current Assets  $15,000  Current Liabilities  $5,400  Net Fixed Assets  39,000  Long-Term Debt  10,100     Equity  38,500        $54,000     $54,000    Beta Corporation  Current Assets  $3,600  Current Liabilities  $1,400  Net Fixed Assets  6,700  Long-Term Debt  2,100        Equity  6,800     $10,300     $10,300  Suppose the fair market value of Beta’s fixed assets is $9,500 rather than the $6,700 book value shown. Alpha pays $17,300 for Beta and raises the needed funds through an issue of long-term debt. Construct the post-merger statement of financial position now, assuming that the purchase method of accounting is used.
The shareholders of Barley Corporation have voted in favor of a buyout offer from Wheat Corporation. Information about each firm is given here:    Barley  Wheat  Price/earnings ratio  13.5  21  Shares outstanding  90,000  210,000  Earnings  $180,000  $810,000  Barley shareholders will receive one share of Wheat stock for every three shares they hold of Barley.  Required  What will the EPS of Wheat be after the merger? What will be the P/E ratio if the NPV of the acquisition is 0?  What must Wheat feel is the value of the synergy between these two firms? Explain how your answer can be reconciled with the decision to go ahead with the takeover?
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