Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 26, Problem 3P
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%.
- a. Should Wansley purchase the paper company?
- b. Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%.
- c. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
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Wansley Lumber is considering the purchase of a paper company which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the
paper company is 16%.
a. Should Wansley purchase the paper company?
-Select- V
b. Wansley realizes that the cash flows in Years 1 to 20 might be $27 million per year or $53 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this
case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 16%.
-Select- V
c. Wansley can wait for 1 year and find out whether the cash flows will be $27 million per year or $53 million per year before…
Sunny Day Manufacturing Company is considering investing in a one-year project that requires an initial investment of $450,000. To do so, it will have
to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of
$550,000. The rate of return that Sunny Day expects to earn on its project (net of its flotation costs) is_
(rounded to two decimal
places).
White Lion Homebuilders has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.45 at the end of the year.
The company's earnings and dividends' growth rate are expected to grow at the constant rate of 9,40 % into the foreseeable future. If White Lion
expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock
(rounded to two decimal places) should be
Sunny Day Manufacturing Company Co.'s addition to earnings for this year is…
Optimal corporation wants to expand their manufacturing facilities. They have two choices, first to expand the current site at a cost of $290,000 per year for two years to complete the expansion, or to sell their current site for $1.3 million and purchase a new larger facility at a cost of $900,000 in the industrial zone.
If the annual interest rate is 8%, evaluate the cash flows for the two options described above and decide which is the most financially beneficial to the corporation?
If Optimal corporation wants to factor inflation in their calculations, what is the equivalent nominal interest rate if expected inflation rate is 4% in the coming years? Critically discuss the significance of including the factor of inflation in corporate finance calculations
Chapter 26 Solutions
Financial Management: Theory & Practice
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