CORPORATE FINANCE--CONNECT ACCESS CARD
CORPORATE FINANCE--CONNECT ACCESS CARD
12th Edition
ISBN: 9781264331062
Author: Ross
Publisher: MCG CUSTOM
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Chapter 6, Problem 2QAP

a.

Summary Introduction

Adequate information:

Initial investment= -$26,300

Sales revenue in Year 1=$13,400

Sales revenue in Year 2=$15,000

Sales revenue in Year 3=$16,400

Sales revenue in Year 4=$12,900

Operating costs in Year 1=$2,900

Operating costs in Year 2=$3,100

Operating costs in Year 3=$4,200

Operating costs in Year 4=$2,800

Depreciation in each year=$6,575

Initial net working capital spending=$300

Net working capital spending in Year 1=$200

Net working capital spending in Year 2=$225

Net working capital spending in Year 3=$150

Corporate tax rate= 22%

To compute: Incremental net income of investment for each year

Introduction: Net income is the difference between the operating revenue and operating expenses during a financial period. It is computed using an income statement. An income statement is one of the financial statements of a company, that is, prepared to determine the profitability for a period.

b.

Summary Introduction

Adequate information:

Initial investment= $26,300

Sales revenue in Year 1=$13,400

Sales revenue in Year 2=$15,000

Sales revenue in Year 3=$16,400

Sales revenue in Year 4=$12,900

Operating costs in Year 1=$2,900

Operating costs in Year 2=$3,100

Operating costs in Year 3=$4,200

Operating costs in Year 4=$2,800

Depreciation in each year=$6,575

Initial net working capital spending (NWC Initial) =$300

Net working capital spending in Year 1 (NWC Year1) =$200

Net working capital spending in Year 2 (NWC Year2) =$225

Net working capital spending in Year 3 (NWC Year3) =$150

Corporate tax rate= 22%

To compute: Incremental cash flows of investment for each year

Introduction: Cash flows represent the amount of cash received or paid by a business enterprise during a financial period. The cash flows are represented using a cash flow statement.

c.

Summary Introduction

Adequate information:

Initial investment= $26,300

Sales revenue in Year 1=$13,400

Sales revenue in Year 2=$15,000

Sales revenue in Year 3=$16,400

Sales revenue in Year 4=$12,900

Operating costs in Year 1=$2,900

Operating costs in Year 2=$3,100

Operating costs in Year 3=$4,200

Operating costs in Year 4=$2,800

Depreciation in each year=$6,575

Initial net working capital spending=$300

Net working capital spending in Year 1=$200

Net working capital spending in Year 2=$225

Net working capital spending in Year 3=$150

Corporate tax rate= 22%

Discount rate = 12%

To compute: Net present value

Introduction: Net present value is the difference between the aggregate cash inflows and aggregate cash outflows associated with an investment proposal.

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Scenario one: Under what circumstances would it be appropriate for a firm to use different cost of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisions, would the riskier division or the more conservative divisions tend to get most of the investment projects? Why? If you were to try to estimate the appropriate cost of capital for different divisions, what problems might you encounter? What are two techniques you could use to develop a rough estimate for each division’s cost of capital?

Chapter 6 Solutions

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