UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 5, Problem 9CQ
The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake Project A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firm’s stock asks you why the firm chose Project A instead of Project B when Project B has a higher profitability index.
How would you, the CFO, justify your firm’s action? Are there any circumstances under which Global Investments should choose Project B?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
In financial analysis, it is important to select an appropriate discount rate. A project’s discount rate must be high to compensate investors for the project’s risk. The return that shareholders require from the company as a compensation for their investment risk is referred to as the cost of equity.
Consider this case:
Weghorst Co. is a 100% equity-financed company (no debt or preferred stock); hence, its WACC equals its cost of common equity. Weghorst Co.’s retained earnings will be sufficient to fund its capital budget in the foreseeable future. The company has a beta of 1.35, the risk-free rate is 4.5%, and the market return is 5.9%.
What is Weghorst Co.’s cost of equity?
1.95%
19.08%
8.02%
6.39%
Weghorst Co. is financed exclusively using equity funding and has a cost of equity of 10.65%. It is considering the following projects for investment next year:
Project
Required Investment
Expected Rate of Return
W
$23,575
9.65%
X…
In financial analysis, it is important to select an appropriate discount rate. A project's
discount rate must be high to compensate investors for the project's risk. The return that
shareholders require from the company as a compensation for their investment risk is
referred to as the cost of equity.
Consider this case:
The Shoe Building Inc. is a 100% equity-financed company (no debt or preferred
stock); hence, its WACC equals its cost of common equity. The Shoe Building Inc.'s
retained earnings will be sufficient to fund its capital budget in the foreseeable
future. The company has a beta of 1.50, the risk-free rate is 5.0%, and the market
return is 6.5%.
The Shoe Building Inc. is financed exclusively using equity funding and has a cost
of equity of 11.85%. It is considering the following projects for investment next
year:
Project
W
X
N
Required Investment
$8,750
$4,375
$2,150
$9,950
Expected Rate of Return
10.10%
13.65%
14.60%
14.10%
Each project has average risk, and The Shoe…
Note:-
Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.
Answer completely.
You will get up vote for sure
Chapter 5 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
Ch. 5 - Payback Period and Net Present Value If a project...Ch. 5 - Net Present Value Suppose a project has...Ch. 5 - Comparing Investment Criteria Define each of the...Ch. 5 - Payback and Internal Rate of Return A project has...Ch. 5 - International Investment Projects In March 2014,...Ch. 5 - Capital Budgeting Problems What are some of the...Ch. 5 - Prob. 7CQCh. 5 - Prob. 8CQCh. 5 - Net Present Value versus Profitability Index...Ch. 5 - Internal Rate of Return Projects A and B have the...
Ch. 5 - Net Present Value You are evaluating Project A and...Ch. 5 - Modified Internal Rate of Return One of the less...Ch. 5 - Net Present Value It is sometimes stated that the...Ch. 5 - Prob. 14CQCh. 5 - Calculating Payback Period and NPV Maxwell...Ch. 5 - Calculating Payback An investment project provides...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Calculating Discounted Payback An investment...Ch. 5 - Prob. 5QPCh. 5 - Calculating IRR Compute the internal rate of...Ch. 5 - Calculating Profitability Index Bill plans to open...Ch. 5 - Calculating Profitability Index Suppose the...Ch. 5 - Cash Flow Intuition A project has an initial cost...Ch. 5 - Prob. 10QPCh. 5 - NPV versus IRR Consider the following cash flows...Ch. 5 - Problems with Profitability Index The Coris...Ch. 5 - Prob. 13QPCh. 5 - Comparing Investment Criteria Wii Brothers, a game...Ch. 5 - Profitability Index versus NPV Hanmi Group, a...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Comparing Investment Criteria The treasurer of...Ch. 5 - Comparing Investment Criteria Consider the...Ch. 5 - Prob. 19QPCh. 5 - NPV and Multiple IRRs You are evaluating a project...Ch. 5 - Payback and NPV An investment under consideration...Ch. 5 - Multiple IRRs This problem is useful for testing...Ch. 5 - NPV Valuation The Yurdone Corporation wants to set...Ch. 5 - Calculating IRR The Utah Mining Corporation is set...Ch. 5 - Prob. 25QPCh. 5 - Calculating IRR Consider two streams of cash...Ch. 5 - Calculating Incremental Cash Flows Darin Clay, the...Ch. 5 - Prob. 28QPCh. 5 - Prob. 1MCCh. 5 - Seth Bullock, the owner of Bullock Gold Mining, is...
Knowledge Booster
Learn more about
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
- Please help mearrow_forwardThe Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2: Year 0 1 2 3 Cash flows (P1) -$53,000 27,000 27,000 27,000 Cash flow (P2) -$16,000 9,100 9,100 9,100 If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept? If the firm applies the Net Present Value (NPV) decision rule, which project should it take? Are your answers in (a) and (b) different? Explain why?arrow_forwardShaylee Corporation has $2.00 million to invest in new projects. The company's managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Initial investment Present value of future cash flows Required: 1. Is Shaylee able to invest in all of these projects simultaneously? 2-a. Calculate the profitability index for each project. 2-b. What is Shaylee's order of preference based on the profitability index? Complete this question by entering your answers in the tabs below. Req 1 Project A $ 435,000 785,000 Req 2A and 2B Is Shaylee able to invest in all of these projects simultaneously? Is Shaylee able to invest in all of these projects simultaneously? Project C $ 740,000 1,220,000 Project D $ 965,000 1,580,000arrow_forward
- Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are summarized in the following table, a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share. b. Judging by your finding in part a and the stock's offering price, should you buy the stock? c. On further analysis, you find that the growth rate in FCF beyond year 4will be 5% rather than 4%. What effect would this finding have on your responses in parts a and b?arrow_forwardConsider two investment opportunities A and B. Investment A: Expected return = 0.08, Standard deviation = 0.06 Investment B: Expected return = 0.24, Standard deviation = 0.08 Which investment would you choose A or B? Provide the rationale behind your decision. b. If company is selecting projects with the negative NPV, what impact this decision would have on the share price of the company c. While forecasting future sales, internal sales forecast is more appropriate or external sales forecast? d. Why are dividends the basis for the valuation of common stock? e. When the constant growth dividend valuation model is used to explain a stock's current price, the quantity (ke - g) represents the expected dividend yield. Is this statement right or wrong? Explain.arrow_forwardA firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.arrow_forward
- Managers are evaluating two independent projects. Project X has a NPV of $282,500 and a profitability index of 2.1. Project Y has a NPV of $ 320,000 and a profitability index of 1.7. Which of the following statements are correct? Multiple select question. If funds are not limited, the company should only invest in the project Y. If funds are limited, Project Y should be selected because it has the highest net present value. If funds are limited, Project X should be selected because it has the highest profitability index. If funds are not limited, the company should consider investing in both projects.arrow_forwardSubject: accountingarrow_forwardAfter the calculation of the correct equity beta, then i want to calculate the expected return by using the CAPM. In the CAPM r_f + beta * Risk premium will i still include the r_f in the risk premium since debt is risk free?arrow_forward
- High Adventure is considering a new project that is similar in risk to the firm's current operations. Thefirm maintains a debt-equity ratio of .55 and retains all profits to fund the firm's rapid growth. Howshould the firm determine its cost of equity?Select one:a. By averaging the costs based on the dividend growth model and the capital asset pricing model.b. By adding the market risk premium to the after tax cost of debt.c. By using the dividend growth model.d. By using the capital asset pricing model.e. By multiplying the market risk premium by 1.55arrow_forwardThe Webex Corporation is trying to choose between the following two mutually exclusive designprojects: Year Net Cash Flow Project - I($) Net Cash Flow Project - II($) 0 (53,000) (16,000) 1 27000 9100 2 27000 9100 3 27000 9100 (a) If the required return is 10% and the company applies the Profitability Index decision rule,which project should the firm accept?(b) If the company applies the Net Present Value decision rule, which project should it take?(c) Explain why your answers in (a) and (b) are different(d) Calculate the Internal Rate of Return of both projects.arrow_forwardhigh quality firms low quality firms 50 75 100 higher lowerarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY