Chap 17 Multinational Financial Management sverty Logistics Corp. san american company that procuces Nigh-tech aectrones Mae Ganon to move ome of I production fociics to Japan In an attempt ta crevmvent certain governmental reydatone, Which of he fw Statements best Jeseries the reason why Rwy Logos Corn hes decid to go lata? Q To mole political, trade, and regulatory hurloe © To sesk proaucion fnaney © Totronden te martcte SoS Soe doe ho aol Corp. hor cece tego label h aero a Sie aes sin Ca [Companies po plat for vartout reasons. Although becoming 2 mubinatlonacomperstion proves roepects for hgh returns and verifetion, ft makes Sania manasemant more compte for fancil exccatives ana manager, {Conair the fllovang ststamant ‘aced on your understanding of the factors that complicate ancl management in multinsiona firme the Q tre O Foleo 2. Foreign exchange-rate quotations ~ an © 100.22 per ero B sisei5e bo ore S smo pone 8 Hac ene 1 €0.010402 per yer & Eo.coKon2 bor yor © co.cosea2 por yor & co.os0009 bor yen ou tow the exchange rat of the euro and the yon inten of Une dlr, — So rae3. The international monetary system LF ne nti August 1971, inductslane counties around the world msinsined# Fina exchange rats of thelr curencies with S. oar, wich wns Foked to gola. The gold sansardzaa systum waa called the Bretton Wands Fined Exchange ate Syaten. This system colapsed fn 1973, and since then, the dol Mas nt bea Hnkad to god! Sret 7 forwsacl [seorenga fata tha quoted pice for unit of foreign currency tote delivered within a vary short NOS oronge rte, which maens st susply snd demand inthe markt dein oe covers ae ait pres Opreciakes sey Areren carr vor art Pom aap ante eget Ege, eee evaluodion o¢ revalul aay recia Torrey refers to = decrenre or merease, respectively in the force 4. Trading In foreign exchange What are spot rates and forws Ballots Inc, 2 U.S, company, produces and exports industal machinary oversea. It rcanty made @ sale to 8 Japanese manufacturing rm for #525 millon, bu the Japanese frm ha 60 days Before le must make the payment to Ballots Inc. The spot exchange rates 128.75 per dolar, and the 60-day forward rates 4123.45 per door. fs the yen Seng at a premium ar ata discount in the forward markatrelstive tothe WS, dollar? O dissount © Premium 1 te customer pays Balgots Ine. the 4625 rion today, ow much Wl Balgoes Ine. race in alse? © $5.58 miton © $5.85 maton © 5.06 maton © 55.09 mon ‘Assuring that the forward markets correct andthe spot exchange rte in GO days wil aqul the 60-¢ay forwerd ‘excranga rate today, Balgots Ine. would get more dolar the Japoness im pei of ts aecoun Game5. Interest rate party nee ‘The relationship between interest rates and exchange rts cen be representa through the concept of intrest rate arty. Consider the ronowing ‘Ap Ararican investor i= conaidarng Investing §1,009 in defat-tras 90rdny Japanese bonds that promi = Se What would ne the investors annualized raturn on there Bond ithe or she'can lack nthe dolor return by saing the foreign currency in tha forward market? 7.286% © iss25% @ ioss3% O ossam Which of te folowing statererts in imped by interest rate party tery? (© tnearast retro ail countries shoud be the sama. (© Aninvestment nore’: home counery shoul have the sama return a @ simile Investment ins foreign © trearest rots nal countries with the seme poiscal risk should be the same. ‘ona courery should Rave tha sea pro in other saurines, adjusted for exchange rate, ‘The law of one price ‘The theory of purchasing power panty (POP) States, foitfolvs investment” Dicect inves9. International capital budgeting wae ‘One of the important comsenants ef multinational captal budsting Isto analyze the cash fans generated from subsidiary companies. Consiar this est sing Rane eluating project in Australi, You hove the flering information about the rojact 4+ The project requires an investmant of AUS915,000 today ane expacta to generate cath fms ‘oF AUS1,200,000 at the endo each ofthe next to years 4 The curent exchange rete ofthe U.S. dolar against the Australian dolls i 0.7795 per usraian aol (AS), + The one-year forward exchange rates 0.8088 / AUS, and the two-year forward exchange rate Is 50.8234, aus. + The firm's weighted average cos af captal (WACC) is 9.5%, and the projects of average risk What isthe dolardenominatad nt present value (NPV) ofthis project? © $1,196,620 © $1,246,479 © $1,047,042 © 507,103 When companies evaluate project investment in foreign nations, they slzo have to consider the additonal risk that {orsign projects are expases to compared to domestic projects, such as exchange raterisk and political risk. Expropriation is one such rk where the govermant of country takes anay a private business from ts owners without appropriately compensating the owners. rien 9 tha folowing actens should companiss take to prevent expropriation? Check ll that epely. Partner wits ocal companies to get access to local frncing. 1D Block the emount of cashflow coming for the subsidiary fr tothe parent company. 1D use transer pricing xo thatthe subsidiary company pays maximum taxes to the foreign government, 1D obtain insurance against economic lossas trom expropriation,10, Multinational working capital management wha ab utinational companies ae exposed to complex management and alleen of thelr resources, A mutinasonal companys cash management, erect management, inventary management, and son, need to have several ‘storalelarsants factoree in compared with those of = purely domestic corporstion, consider this eas: Streep. 163.5. -hased multinational fren with 9 icons related to smountof invesement in ae Subsidiary n Switzerand, Last weak, Steop crestad t= ‘vero endive oor ree fcr in ee francl sate, re he iy hd $F 50,00 worth of verry on rb she. Seep arlted te veo veto ang the pt o elven oie ‘exchenge rate at that time of $0.8153 / SFr and recorded + oni ofimport and exporqutasor —_thtvaue ons consolted bores ses eis Howvar, this weak the exchange retechangad : ‘ramaticly to $0.7678/ SFr. Tha subsiiny si has the Usceeserdbaterateese_ al sume amount of inventory (valued at SFr 50,000), + Tax consequences 1 the frm were to create 2 naw consolidated balance sheet and transite the value of es Inventory the new spot ‘exchange rate, what would happen to the dolar value of inventory? © tt wouid incre by 52,612, © itwoule decrease by -$2,375, (© Itwouid increase by $2,850. © tr woud increase by ~52,375, ‘The change in inventory value was crest purely by accounting and exchange rate factors, becsute the Subsiciary stil has the same inventory and assets in place. However, tis change would aac Steep’ congoldstedfrancial statements and ratios. Assuming nother changes occur, what afact woud this have an Streep’: currant rato? Q The curent ratio woud increase © Tre curent ratio would decrease Chap 16 Working capital Management1 Basic concepts nae S Flowers by irene in. regeted the folowing resuts fr curentassts and abies nits moe recent balance sheets, Iteestigy the company’ soles dd not change, one reported Sle of $11,100 as most eet Yea oF 8 at ver. ‘Tne coms tae Enaing (4 sho rots from he most ecnt yer; ane the clams labeled “Begining 6)" show esate tthe od oF te previous + Powers by fee's ays of wothng capa improve rom ays a he end ofthe mst recent yor 1+ The company's net working capt nereas trom $3,500.00 nthe pesous yea to atthe oft yer “+ Plows by Irene ines net operating woking coptal need from inthe previous veor%@ 57,500.00 the end of ast ye. S¢ UGG .00 # 3400.00 HY¥YOD.00 Consider the folowing statement: ‘ated en your unerstanaing f working aptal, cpeaing ase, ox monoperatingastets ently whether the preceding statement true oF ‘ate. © Fatse Ome2. current asset investment policies an ‘A frm’ asset of capt requrements grow over tin enc usualy exhib tempore (Seasonal varaton, Fs must Solve the calenge oa to fiance ther assets th a combination of shor and long-term franc, The elvan GrapheaRBRE the rations for 9 pact fm Which othe fosoming designations bet charateae th fm’ poy of nancy astets? Q Consorative pty O Acgrassvepoey| © Woderate pay ‘hare i shaced region onthe precezing graph. Which ofthe following statements best desrbes the ms stustien curing th tims? (© them nas excess capt to vest cash or Marketable sects © the tim must rey on shat-ern barony 3. Financing current assets aka suppor tm wort to toe odantape Pan ups ys cave then bane tht eet te wi Say contort at wants toe he cuenta cuve Boer pats, wich oproach shad en on? Q Conservative approach Q Maturty matching approach © Agoressive approach ‘Suppese 3 frm cecasnally faces demand for shatter erst but usuay has an exes of shot term capital to fnnance curont asset. Which approach ie the frm fllowng? ( Maturty matching approach © Conservative approach © Agressive approach Which usualy costs fass—shor-term or long-term debt? © Long-term debe © Short-term debt4. cash conversion eycle whe S 123 Warehousing has forecasted sales of $29.0 milion for next year and expect Ms coat of goods 30d (COGS) to remain at 70% of sales. Currently, the fen holds $2.9 milion n inventories, $1.9 millon #9 accounts receivable, and 152.7 miion i accounts payable, Approximately how tong does it curently take 123 Warehousing to carver rm ‘material tots nisheo products anc then to sll them? Use 365 days asthe length ofa year al clcuations. 44.22 dave O 52.14 aaye © 26550 aaye O 46.93 aaye ‘on average, how lng Goes it take rom the time a sales made until the time cash i slat from customers? O 23.91 days O 2271 days © 19:13 aos © 20.32 dove 123 Warehousing rales on customer creat when it buys raw materials from Is supplies. How long does it take ater the tm purchases materiss before it sends cash tows supplers?{___— =) nat isthe length of 123 warehousing’s cash conversion eyee (CCC)?[——— (oC pater Ingereal re peer Se paseo ‘con 9 fem have a negate ccc? O vee 0 Wo5. cash budget aha ‘Mooney Eaulament putting together is cash budget forthe fllowing year ane has forecasted expected cash celections over the next five quarters (one yer plus thelist quarter of ext yest), The cash collection estimates ore basee on cles projections and expected collection of recewables, The Sales and cash collection eatmates are shown In the folowing tobe (i ition of coll): b ‘You ait have the fllowtyg information about Money Equipment: | You are atthe one ofthe currant your an QI is the next period + Im any aven period, Mooney’ purchases from suppliers general account for 78% ofthe expected Sales nthe next period, and wages, supplies, anc taxes are expectad to be 15% of next pared'é “+ Inthe thir quarter, Mocrey expects to expand one ofits plants, which wil require an addtional $1,078 milion investment. + Every quarter, Meaney pays $45 milion in intrest and dividend payments o long-term debt an culty investors + Meoney prefers to keep a minimum target cash balance of at least $16 millon atl times. Alo millions 4 1218 million H \ I million - a 22 million = 4 (380 milion 4 4g wuillion = 4 (312 millior 4 132 millon 23 millon 26 millcon 23 million 17 million SBR million -8 2 milion — R336 million — & AY willow Using the preceding information, answer the flloing cuestons. ‘What is the net cash Inflow that Mooney expects inthe third quarter (Q3)? 1 ooney is beginning this year witha cash balance of $39 millon and expects to maintain 28 minimum target cash balance of at least $16 mullon, what wil be its ikely cash balance at the end ofthe year (after 04)? \What isthe maximum investable furs that the frm expect to have in the nest year? at isthe trgest cash cist tht the firm expats to suffer inthe ext year? Te oF Fale: One ofthe fm's suppl offers payment terms of"3/10, net 50" and the ether ofers net 30. Ifthe firm chooses to ao withthe one that offers "3/10, net 30” and everything else remains the sare, the frm’ net cash ow Istkely to Increase ina monthly cash bucpet afte afew months. O Fale O the6 cath balances aha B ‘Cash is considered an ile asset, because doesnot earn terest. Its Good nancial management to hol tes ammount of cash, but ts important to hold enough cash so that carentoblgations can be pad, the fms eet rating can te maintained, ana unepecteseash needs con be met. ‘The folowing etatemont refers to 3 type oF cash balance. Select the best pe of cath balance fo compete the exntence, wrecanhs aaa ‘cash balance i required by many banks that perform services for the fm. Monchestor is a manufacturing company. Manchester's chef financa officer concemes about the rk of ‘uctuatins in the latest cash forecast that was prepares for Manchester. To mitigate the rise, the CFO has increased ‘the cash halance on hard a a type of safety not he frwcae not mek. What type of balance does tis sound ke? O Transactions © speculative O Compensating © Precastionaey7. Check clearing and the use of float Ww aka 2 oats desined asthe ference between the balance shown i the books and the balance i the bank account, A ture lg often occurs Between the time when receets and disbursements ore recorded i the company's books ond ‘hen the transactions cleo the bark Read the scenario and answer the question that follows What type of flat oes this conor describe? © cotton Hoot (© Dissursement oat © Net oat “The management at Washburn Flooring Co, determined that it takes an average of sx days for checks the company wetes to dear its bank account. Cosh receipt from customers are reflected in Washburn’ bank account an average of to days after the checks ere actully received. On an average day, Washburn wats checks that tta $40,000, an receives checks from customers that total $50,000. {Compute the cotecion Noa, the dsbursement foot, ans the net Raat i dors in te following tab, (tit: cerntion, collection fos is always conszered negative, and disbursement Moat is aways postive. Both should be entered 3s postive numbers, Be cure to enter the et Roat a8 negative 1s book balance18 Accounts receivable ae B fective credit management involves establishing crelt standards for extendeny creat to custorers, determining the company's terms of erect, and setting up procedures for nvoleng and colectng past due account, —— ‘he eon tater eer 3 eet manera. Set ete oomph setae, (CrOdY slanbat iadice (collection policy indi cates (ems of credit indicat ‘Acompany's the conditions ofthe credit sale Incudng cash aiscounts and due gator Universal Exports Inc. has very attractive crest policy, and none of Universal Exports Inc.'s customers pays in cath hen the fm makes sale. Universal Exports inc. soll to its customers on cet terms of 1/10, net 30. 2 ‘customer bought $125,000 worth of goods and paid the firm cash eight ays after the ele, now much cash wouks ‘Universal Exports Inc. get fom the customer? Q siisexs O 5123.750 Q s112,.500 © sios.i2s Aoproximately 20% of Universal Exports c's castomers take advantage of the dlecount and pay on the 10th day ‘The reining 80% take an averape of 35 63S to pay off thelr accounts. What 1 Universal Exports Inc's Gays sales outstanding (050), othe average collection period? O 23040 O 20.0¢ays O 35.0¢ays O 285¢ays9. Cost of trade credit ae S Noroyne ine. buys on terms of 1/20, net 69 from its cle supple. [fNordyne Ine. receives an ioiE® fOr $1889.12, chat would be the true price ofthis voice? Q $4,706.42 O $4,380.13 O stso242 O st.io.10 ‘What isthe nominal annual cost of the rade ret thatthe supplier extends? 922% 2 8.30% O 10.60% 2 692% ‘Suppose Nordyne ne. does take the clscovnt ond chooses to Day RS supole late. On average, Nordyne Inc. pays Its Supplier on the 68th day after the sale. By Row much does Norcyme Inc decrease Is actual nominal cost of trade ‘ret by paving late? Q 082% O 124% 0 109% O 1.00% 10, Bank loans ma Bo ‘Clancy ane Smith Corp. nec to take out 3 one-year bank lan of $850,000 and has been offered several dterent terms. One bank has oferee a toon wth 6% simple inerest that requkes monthly payments, The loan orice wll bbe poi back atthe end of the year. Based on 3 360-doy year, what wil be the monthly payment for June? (int Remember that June hos 30 days) O szas536 Q $3:566.67 Q $4,400.00 Q $3,200.00 Another bank has offered 5% adc-on interest to be repaid in 12 equal monthly installments. What i the monthly ‘payment on ths ad-on interest oan? 2 s5,1875 O 548,125.00 Q 538,500.00 O ssossi.2541 Short-term financing aa 2 ‘ash ows rom eperatons oy nl uti fr nto keep ue with nts fancing ees, the fem mov nthe able to always generate cough ash oto mintan 9 srl fash Fre retro bow now to father capital eee troh means af sorters tancng or long-te anchg, th metros hove ther aevamtages ana esaovotapes. ‘The following statement centfes 3 possible characteristic of short-term Rnancing entity whether preceding the statement Is ue o fale. Q Fase O Tne ims use a variety of short-term firancing sources to support working epi. Use the descrgtons inthe flowing table to identity the short-term financing Soure. Secured loan Chap 15 Capital Structure Decisions1. Capital structure decisions and firm value maa B ‘Coptal structure decisions involve the mye tht a ms assets are Ananced and are often presented as 9 percentage ‘ofthe type of nancing used, such as deb, preferred stock, and common eat: {sith al nancial Gecstons, frm should try to St 3 capital structure that maxinzes the stock gree, ot shareholder value, Ths i calles the optima capital structure; & 6 aso the debt-equty ms that (O Maris the weighted average cos of captal (WAC) O Maximizes the net income O Maximizes the dividends © Minimizes the weighted average cost of capital (WACC) ‘Suppose you are conducting 2 waskthap on capital structure decisions and you want to highigh certain key sues ‘lated to captal structure. Your assistant Ras rade 2st of points fr your session Your assistant thinks that he right ava mae same mistskoe. Review the Ket ans sent which ems ars coract. Check al that app. Workshop Talking Points The pretax cast of debt increases as the frm’ isk of teankruptey increases. ‘an increase in the risk of bankruptcy I Mety to reduce ‘the em's foo cash fue inthe ture ‘An increase in deb fnancing decreases the risk of onkeuptey. an increase in debt fnsncng beyond 8 certain point i ely to increase the cost of equty Asks of bankruptcy merease management spending on pergulstes and increase agency costs2. Breakeven anatysl Petrox i Co. i considering a projet that wil have fete Cots of $15,000,000. Its sale price wl be $37.50 per unt ‘ane twill Rave 2 variable cost per unt of $11.25, Therefore, Petrox OR Co, has tose units to break even on this project (Qa ‘ > Petro Ol Co.'s marking ana sales crector doesn think thatthe firm's market le big enough forthe fem to break ‘even. In ac, she besieves tha the fer wil beable to sell only about 200,000 nits. However she alo teks that the demand for Petrox Ol Co's producti eatively inelastic, so the frm con increase the sales pice. ABsuring that the frm ean sell 200,000 uit, what orice must it et to break even?” Q s103.50 © 39498 © s8625 O $81.94 ‘Several Factare fac a fiem's operating breakeven point. Based on the sconaroe ascribed in the folowing tab Inccate whether these foctors would increase a firm's breakeven quantity, decrease the braakeven quantity, or ead too change. ‘hen a large percentage ofa f's costs ore fixed, the fem I sald to have: egree of operating ever. Wak eo \ow|. Understanding business risk and financial risk ote B {Asan anahst, you ae comparing two nearly Menten manufacturing fms: Markung’s Co, amd Beat Design Co. It 's your jb to evaluate the relative business and nana chs of Markung’s Co. and Beatnik Designs Co. ‘The two firms have the same lvel of ttl asoets and expected net operating profit after taxes (NOPAT), but they ter on tao crtkal characteristics: toal debt and the stondard deviation of expectee NOPAT. The following table ‘tines some of Morkung’s Co.'s and Bastnik Designs Co's characterises. ‘Ute the gen financisl ata to ndiats hich im has the higher degree ofeach typeof ik Wien fm has more financial ik? Whi ren hae more busines ik? O seatmik designs co Q Bestrk Designs Co, © Morkung’s co © Markang's co.4. Business and financial risk ase @ \Westem Gas & Electric Coe conscering 9 project that wal require $400,000 in assets ‘+ The proyect is expected to produce an EBTT (earings befre intrest an taxes} of $45,000. + The prose wll be fnanced with 100% eauity. ‘+ Thar willbe 15,000 shores of commen equity outstanding 1 The company feces 3 tax ate of 30%. Using the preceding information, what willbe Western Gas & Electric Co's retum on equity (ROE) for this project? 3 9 sam O 7.85% O 7.00% 6.30% Western Gas & Serr Co's earings par share (EPS) wil be ecuty. fie nances This project with 100% Weston Gas & Electric Co's CFO I ales consléering financing thie Eroject with SO% debt and SO equity. The Interest rate on the company's debt wif be 13%, Bocause the company wl nance nly SO% oF the roject wth scuity,t wll have enly 7,500 shares cutstancing. What will be the ROE en the project the company deciles to ‘nance the project with SO% debt and SO% ecuity? 2 765% 2 1% O 732% 0 665m [Agathe uses move Gab in ts capa structure, lenders wil usualy the inlerest ate charged decresse\ 2) Increase Western Gas & Electr Co.’ EPS wl be \FIERRINES this project with 50% eaulty and SOM dete‘5. Assumptions of the Modiglian! a aller proposition mda t ‘An analyst hos graced the relationship between the expected return on a fm's capital and ts debt-eaulty (O/E) ratio Her grooh fons From what you see on the graph, which f the fllowing azsumptons i consent withthe graph? (Q Excessive nancial leverage causes a decrease inthe fs EBT. Q The cost of equity wil nays remain higher than the ost of debt. © The arm's debe is sk ree. (© The arm's debe hae no deraut ik sted on the sumption thst frm oporats na ax frae wos, Medgin’ ane Mil made an important proposition about the value ofa levered portfolio (¥) and an unlevered portato (Vy). Which af the fotowing ‘equations bast represents the conclusion from the MH: No Tax thacry? Owen Ow Ow=K+0 O%=5206. The effect of taxes wa B Debt financing hes one important advantage thatthe early MM propostionslgnare: Interest on deb stax deductible, The amount that taxes ae recuced because ofthe use of debt is called the interest Lx shied ‘Suppose Stole Food Co. had an unevered vale of $95 milion. Stler's marginal ax rate 1s 39%, ond thas $20 rillon In debt. Acording to MMs propostion with taxes, what is the levered value ofthe company? Q $65.00 mation © $105.70 ition Q $82.30 milion O $125.00 millon ‘Acting tothe ciscusson regarding the effect of taxes on the fer value, Miler further discussed the effet of taxes from an investor's perspective. is focus was onthe effec of personal taxes and to what extent personal taxes can Giminish the benef of cebtfnaneing, He eprosontod the value ofa levered fm as ef ARR According to Miler’ theory onthe impact of persona taxes, which of the folowing statements i rue? Q Debt financing has an advantage over equtyfancing because it provides an intrest ty she © Accoring to miler, eguty fnaneing’s advantage over debt financing rests fom investors ably to Seer the dividend ane capital gains income provided by the equity.7. Capital structure theory whe B ‘Te Modigln! and Miler theories are based on several unrealistic assumptions bout debt fnancing n eat, there are costs, taxes, and other factors assoioted with debt financing. These costs or elects have led to several theories that explan the impact of these factors on the capmolstrAtUrE a 2 fem. ‘Bosed on your understanding ofthe trade-off theory, hs kind of firms re ely fo use mare leverage? Q Firms that have relatively higher busines rik compare to other firms in their incustry © Firms that have relatively loner business risk compared to other firms in ther industry entity whether each of the following statements is tue o false. ‘Several dominant theories try to explain why financial managers make the capital structure decisons that they &. ‘he following statement describes one such theory. entty mich ofthe two theories is described by the statement. O Pecking-order hypothoss © Trase-om tneory'& Determining the optimal capital structure me Ra ‘ronsworl consortium Cor. trying to ently Re optimal capil srture,Transnelé Consorthan Cor. has gathered the folowing financial information to help with the analysis. ‘Which coptal structure shown inthe preceding table is Tronsworki Consortium Corp's optimal eaptal structure? Q ete ratio = 40%; equity rato = 605% (Q Dobe ratio = SoM; equity rato = SO Q Date ratio = 3084; equity rata = 705% Q Debt ratio = 60%; equity ratio = 40% Q Debt ratio » 70%; equity ratio » 20% lobax Corp. isan all-equty frm, ans lt hae a bots of 1 Iti cneicering changing ts capital structure to 65% ecuty ‘and 25% debt. The firm's cost of debt vil be 8%, and it wil facea tax rate of 45%. What wll Globex Corp. beta be lit deckes to make this change i its capital structure? ° ° ° ° U.S. Robotics inc has a current capital structure of 30% debt and 70% eaulty. Is current befve-tax cost of de Is 18%, ond Rs tax rate is 45%. curently hes 2 levered beta of 110, The rskfree fates 3.5%, ond the ek prem ‘on the market 6 7.5% U.S. Robotics Ine. Is consicering changing Its capt structure to 60% debt and 40% equity. Increasing the fs level of debe mil cause Ks before-tar cost of debt to increase to 10%. Use the Hamada equation to unever ond rover the beta forthe new level of dob What wil tha fms weighted average cost of capital (WACC) be Hit makes this change ints capt! structure? 6m O 9.1% 0 10.8% 0 9.6% d x ‘The optimal captal structure the onto ‘the wace ong 7B _ the t's stack ice. Wigher debe ievels_____‘the firs isk Conseaventy, Nghe vel af Got cause he's cot ot eauy Wace ease} two G [deerese, decrease, ACV CASE ie Chersal Co hs found that SERBS EPS tz maxisne at 9 deb aio of 459. Does this mean that Als ‘Chemical Co's optimal capa structure calls fr 45% Gebt? O ves9. Recapitalization wae B ems use recapitalization for diferent reasons. Recaptolzation the process through which firme make desked ‘changes in their coptal structure by using debt to repurchase equty, Firms may decide to recapaize or various Feosors, such 25 to maintan an optimal capital structure, to use as 3 defense mechanism agalnst 9 hostile takeover, tominimize taxes, oF to use in an ext strategy for venture cpitalis. ‘Asan anahst, you ae tracking the Mnoncal performance of Chand Corp. The campomy has been 100% equity owned ‘but receny mage changes to Re captal structure. You have colected the fotvang infcrmation about the recaptatzatlon: + han issed 17,500,000 im new debt to buy back stock. +The frm has no short-term investments before or after the reapltaization. + han had 1,250,000 shares outstanding before the recapalzation. + Chanc’s capital structure now has 35% deb: ‘+ The company's operations ate values at $50 milion after recaptalzation. ‘Based on the intrmation aval, salve fr the vals inthe following table. Cck onthe dropdown menus and then SH Qye-c0 mill dD \b-2s will A 22.2 will a 22.15 \ Barden er aaa you spi report th ve rns. Whe enn, ev core arom the | BIS ,000 SATS following inference. sp0,000 S| Is the statement tr or flee? me O Fates Chap 14 Distributions to Shareholders: Dividends and Repurchases1. Dividend policy and free cash low ae B ‘companies, especialy established corporations, set up 2 poly, which soften called 9 estihutan patcy o @ payout pole. These polices spect whot companies intend to Go with ther profs and the free cash fo (FCF), The ‘objective sto create 9 distribution policy tht increases the Value of the fem and maxenzes sharehalger weath, {Which ofthe following help fms determine the actual implementaton of ther dittbution pole? Check a that poly 1D the ove of cath datrbutione The lve of debt and interest payments D1 The stability f payments to sharcholders 1D The form of payment to sharaholiers ‘Afi con make any form of cistribution tots shareholders using the free cath Raw (FCF) that ft generates, The underying objective isto maximize shareholder wealth by increasing the firm's value. Any use of the FCF that has 2 ‘negative impact on the fms value Is nat considered a good ute ofthe FCF. Which of the following uses is considered a "gvcd” use offre each flow? Choose the Best answer Q Make payments towars captl expenses © Pay principal on debe True or False: A company invests 15% of ts FCF ia marketable secures, Th makes it liu fr thet to access its funds to supports growth 7 > Fre Fate2. Dividend payment procedre one vend pty refers tothe mur in whe 9 frm tbkes Rs comings to shareholders ‘Spud an Dreamer ine. recently pai 9 ciigone to ts sharehlders. The following table offers 3 tmeline of events ‘surrounding the dividend. ‘Based on this information, anzwer the following questions. t payment? ‘nat ste last day that an investor con buy 9 share of Spud and Oreomer [FY {nes stock and stil be entitles othe dicena? ‘Which day mil Spud anc Dreamer inc. actualy pay the divideng? [eae JF Victor buys 10 sharas from Susan, by what business date must Vitor inform the company that he owns 2 that hei ele to receive the dividends? 2 hows O beet O oaz O tvs3. Stock repurchases wae Bo ‘Suppose 8 fr finds tsi 9s the target ofa possible hosble takeover. An outslde investor hae aonuired @ mor stoke ‘of shares and is trestening to exert infvence onthe board. Ifthe rm wants to kluence the hostle bidder t leave ‘alone, whieh ofthe foRoming methods could be an effective way of dong £07 Q Tender etter Q Dect negeiatin Q Auction Q Gpenmarkat raneactn Ina tavless worts with no brokerage costs, repurchasas and dividends have the eome effect on shareholder wealth In the real wort, nowever, repurchasos provide more preferable tax treatment than dhidende to ernary investors. ‘oes thi mean that firms should always use share repurchases #0 that investors can gain fom this tax benef? O ves O no In genera, ore stock repurchases 9 Subsite fr the rm paying éhadencs? in other words, will frm ether pay a ‘lidend or repurchase shares, but never both? O ves O Wo‘5. Dividend preference theory (bird-in-the-hand theory) aka Despite Some theoretical assertions, many investors do care a great deal about Ghidends. They blkve that sure ‘luidends today (bird n the hand) are less sky than a return nthe Soren of capita gansta fture ‘The table below ists some factors that might affect an invest’ preference for dnidencs Inclcte whether the given factors are likely to make an ivestorprofor to receive more or fewer avigende. In examining investors preferences for alvigends, it useful to begin withthe concept of eviensirelevonce DOhicend arelevance suggests that 3 word wth no market fictions oF taxes, kms and tvestrs fe naferent to the paving or receiving of dividends. However, as these restrctions are relaxed, various factors suggest that fms shoulé pursue Nigh or low payouts. One such factor sated below. Corporate nvestors m common stack may exclude 70% ‘ther Bvdend income fram tones. ‘Based on the foctor given above, identity whether corporate investors, in general, wilted to favor high ar low payout ratios, O Favor atow payout © Favor a high payout4. Dividend poliey mae B ‘tary ale depends ons xe fe a fom nd HE ot fap Dette ade he om of cif or tack repress ipa he's wlan he ver erent ay Markumn's Co. pod 8 dividend of $1.50 last year, and in the past ts cividend has increase steal by about 2M 2 Year. Morkur’s Co, Just announced that Is dividend wl increase to $2.10 this year an Its stock pice rose orn $28 to $20 immediatly after the announcement. Which ofthese best explains why the tock pre creased ae it os? Q The signating hypothesis QH aivdond relevance O The clentate eect “True or Fase: Mociginl and Nulerarguad that each shareholder can construct his of her own evden plc. O False O tie Mocigin’ and ster aso poled cut that many insttutona investors 60 ot pay taxes and can buy and sll tock vith very low transaction costs. For these investor, ducene pole relevant than is foram inawiguat = We ‘Anather frm calles Lootem Power & Water an estabished public uty company, has been paying didends forthe ast 20 yers. Ts yeorLootem also announced that I wil increase ts ldencs by 10%. Which cage of Investor Ie ‘more tty £9 be pleased by Lote’ civicend announcament? (O tnvestors with high tax rates who don't depend on curent civgend income fer ving expenses (© investors with tow tax rates whe depend an curenteivicend inceme for ving expenses Ateme dividend policy determines ts current cientele of investors. G Sukuve packDividend preference theory (bird-in-the-hand theory) aaa B [Despite sore theoretical assertions, many investors do care a great deal about dividends, They believe that Sure ividends today (0 bird n the Rand) are les risky than return inthe for ofcaital gains inthe future. The table below ists some factors that might affect an investors preference for duidends.Inccate whether the glen factors ar tkely to make an investor prefer to recive more or fewer cvgencs. ‘With captal gains, shareholders in high tax brackets have the ability to | | defer taxes int the future. {in examining investors’ preferences for eviends, I fs useful to bepin with the concent of aidend relevance Divi erelevance suggests that 9 word wath no market tieions oF taxes, ms and investors are inferent to the paving oF receiving of dnidends. However, as these restrictions are relawed, various factors suggest that flrs should pursue high or low payouts. One such factors sted below. Corporate investors in common stack may exclude 709% ‘af hel dvidend income tram taxes. ‘asad on the factor given above, idantty whether corporate Imastor, im general wil tand ts favor igh or low payout ratios. Q Favor o low payout O Favor a high payout(6. The residual dividend modet & ae ‘The residual clstbutln poicy approach & based onthe theory thot firm's optimal itbtion poly Is 2 function lof the fers target eaptal structure, the mvestment cppertunites that the fim has, ad the avaiabity and ost of extemal capita. The fm makes cstbutions based on the resiouol eamings ‘Sith and Janes Co. hos generated eamings of $140 milion. Its target capital structure conssts of 69% eauty ond 40% debt, I plans ta spend $83 milion on capital projects over the next year ane expects to finance thi investment {nthe sare proportion ass capital structure, The company makes cstrbtions nthe form of diidends. What wil ‘Senth and Jones Co's edidens payout rato be Ii olons a residual distribution paley? 2 432% O 512% 0 57.5% O eam, Most ems have earings that vary considerably from year to year and co not grow at reliably constant pace. Furthermore, their aquired invasiment may change ofen. Does ths mean thot the residual eietnistio policy ‘spproach cant be of any hap to most fms? O ves O No 1 you were to graph 2 frm’ earings, cashflows, and Okdends over the past 20 year, which would you expect to bbe the moat stable overtime? O cash tow O Dwidends © Earnings7, Dividends, repurchases and frm value one Rememte that he grimary goa fo fen sto mnie shareobier welt by increas Hs nende Vae,t tha Imgoan to understand the impacto elstbutions~bath in te gor of Buidends oF stock repurchases the fs vale ‘oth is 9 fnonclonalst n Blget Carp. As pot of er anal fhe ana titan pay ants amp on the H's ale, she makes the ftowingrakultons ond observations: + Te company generate are cash How (FE) of $59 mito nt most recent ea year +The fers cost of opt (WAC) is 128. The fam has bon growing at 6% fr the pats yous Be expected to gro ata constant ate of 74 in the are 1 The fir has 17.25 min shares tstancing. 1+ The company hae $184 million n debt and $18 monn grfers stock, ‘Along th the rest ofthe fnace tearm, Ky as Been prt Board mestigs ane Knows Et the company ponning to stbte $405 ths point pst tam the $105 rion n short-term investments, the fm has ao Gtr Ronopertig ears. Using results fem Kathy's eakusns and observations, sve forthe valves Inthe folowing tales. Selec the best answer proved inthe socom let 11360 wai 5 wit | AW Tbeleo anil a a (Woo mill (27S rail 1 (223 mill TUTE owl A 1yeT wil 4128. Dividends vorsus stock repurchases wane Tonoring possible tax effects and signaling costs, the total value of firs equity remains the some respective hon the fan dstibutes ts resioual earinge—chdende or stock repurchases. Each dstrbutlon method has ceria ‘advantages and dsaavantages, ‘Sesed on your uncerstancing of Uvkends and stock repurchases, select wether eoch ofthese statement is true oF false.sctors that influence dividend policy nae Dlstnbition cechons oe complicates and involve the ungerstancing of Rial strategie actors that atect the policy ane value of afr, Thus, the management of ay fm has to onside the constraints on dividend payments the avalabitty and cost of alternative soures of capa, and athe extemal factors when they crete and implement their giatibution pay. Besed on your understancing ofthe constraints on dividend payments entity the type of constraint this condtion resets Assume that a lhe for are hls constant, Q impsiement of capital rule © Bend indenture Q Avaitabitty of cash © Option contract, ‘Along with several constraints, ssveral internal factors within 2 company and external macroeconomic factors affect 2 firm's vided policy In the table, Identity which factors, in general, ten to favor high cr low payout ratios. hen sta ge unr pte nein opti wun ne Re aon ‘Afr that can adjust its deb ratio without raising ts weighted average cost of capital (WAC) sharp is ey te hove @ stable dividend poly. Wore \us10, Stock dividends and stock splits ua “Tobotes ine currenty has 10,000 shares of common stock outstanding, Its management Beboves that its current stock price of $110 per share to0 high. I Tobetis Ine. declares a two-for-one stock apt hat wl be the price of the company’s stock after the spt, assuring that the total value ofthe fms stock remains the same fer the sok? Q 22750 O 85.00 O $3687 © s2200 ‘Weghoret Co. curenty has 1,300,000 shares of common stck outstancing, the fim pays 2 7% stock dividend, wat wl ba ts otal number of shares outstancing ater the sock dividend? Q 1,260,580 shares Q 1,590,680 shares Q 1,530,100 shares © 1,301,000 shares 41. Dividend reinvestment plans ae Dividend reinvestment ons (ORIPS allo shareholders to reivest their ddends im the company ite by purchasing adctional shares rather than being pel ou cash An stock under Bn ‘OLA SHO dens reinvestment pan, the company gies any cash vided that investors would have received toa bonk, which acts aso trustee, The bank then uses the money to repurchase the company’s stock ‘on the open stock market. The bank allocates the shores purchased to the potklpatingstockroldrs accounts on @ ro rata bast Lah ‘ lees of partceaton na dhend remestment progr suggest tht socknllers nos be beter Saved tr rested ees Sends zZ ‘True or Foss: A fin I ikely to stop using ORIPS it neds acdtionl equity copa Q Te O False Chap 13 Corporate Valuation, Value-Based Management, and Corporate Governance1. Overview of corporate valuation ‘Corporations assy assets as efther operating nonoperating,Inckate whether the fllonng transactions describe an operating oF 3 noraperating ase “Trey Gordon has recenty opened a rusic production business that does Rot pay any dividends. Ho fe consiering taking on a partner; however, he wants to have acear lia of what his Busines ie werth bfore going into ‘negotiations. Trey should use the| ‘corporate valuation model > ‘vgend growth mee12. Corporate valustion model rere ‘The corporate valuation model, the price-to-eernings (P/E) multiple approach, and the economic value-aded (EVA) approach are some examples of valuation techniques. The corporate valuation model ssi tothe ‘Svidend-based valuation that you've dane in previous prolams, bt i fcusascon firm's ree cash loves (FCF) Instead ofits dive) is. Some firms don't pay dividends, or tie viends are dificult to forecast. For that reason, some analysts use the corpora vlustion moa Triptych Food Carp. has an expected net operating roft afr taxes, EBIT(1 ~T), of $2,400 millon inthe coming year. In adaton, the frm is expactad to have nat captal expenditures of $360 milion, and nat operating working captal (NOW) i expecta to inersase By $30 milion. How much fee cash flow (FCF) i Tritych Food Corp. ‘expected to generate over tha naxt year? © $2,070 mien © $2,730 mien © $2,010 mitisn (Q $60,585 mitton “Toptych Food Corp's FCFs ara expectad to grow at 8 constant rats of 2.82% per year inthe future. The market value of Triptych Feed Corp’ outstanding debt is $16,037 millon, end preferred stocks’ valve i $8,910 milion, Triptych Food Corp. has 450 milion shares af common stock sutstanding, and ts weighad average costof capital (WAC) equals 8.46%, Using the prececing information and the FCF you — At 138,469 - FNSI, bas ‘A postivay signed AFN value represents: —f jab, 264 © A shortage of internally generated fads that must be raised ousie the company to ance the company’s forecasted future growth © A surplus of itera generted fads that canbe lvesed i ysl or ca BEES Oa Ot 3 ‘tions! evcends (© A point at which the funds generates within the rn equal the demands for fade ta inane the fn’ future expected sols eautrements ase on the AFN equation, the fins AFN forthe pace year ie 63.2% 12-2% Bi. 2% 40: 3%, secate os excess nds, Corian Engineering Crp tnking bow rng Re cvidend payout ratio to satisy shoreolders. Corellon Ergering Car. cud py ost of ts crag to sorcholers itu needing toraise any extemal capital. (Hint: What con Corton Engineering Corp. GATE Rs Gvidend poyoxt ratio to before >> the APN bsmes poste?) 5. Using regression analysis to forecast assets nm he Sb ‘eA cua dhe recat acl teens etd bth ssa tht sso ately the tone te ewe, However, te retont btveen sand sakes ten te rere ethan beri, some [yp un reresoun sav toed! he ened ets nected to mppor gen lof ee General Services Corp. haf ee ts stoic sk 6 as60t data to estimate the flloning regression equations: Accounts Recaivable ~ ~S85,230 + 0.226(Salee) Inventories = $8,765 + 0.211(Seles) ‘General Services Corp. currently has sles of $922,000, but i expects sales to grow by 10% over the next your Ute the regression models to calculate: General Services Corp.'s forecasted values for accounts receiva reece to support nest year's eles. ‘Based on the next year’s accounts receivable ae inventory levels precited by General Services Carp. represion ccaations, the firm's 050 for next years expected to be al caledations.6. Excess capacity adjustments aa B Tink Inc had soles of $1,790,000 lst yeor on fhed assets of $270,000. However Tink Inc's aed assets were being sed at only 9286 of capacity. What 4 Tink Inc.'s feed: assets tumover ratio? 2 7.956% Q 6.962% O 6.205% O 620% ow much sales could Tink Inc have supported ith its curent level of fixed assets? O s2012,935 O si818.369 O sisis.es2 O 51,653,804 ‘When you conscer that fixe assets were belng underused, wht shoul be Tink Inc's target fixed assets to sles ratio? Q Ham O 13.0% O tae O ow ‘Suppose Tink Inc. i forecasting aalescrowth of 18% forthis year. If existing and new fed asses ore used at 100% capacity, what & the fr’s expected Rixed-atets turnover rate for ths year? 2 8.25% 2 7.566% O 792% © 7.206% 7. Financial ratios in the forecasting process whe D ‘Aontc Northern Ine, current has $660,000 in accounts receivable ane generated $4,350,000 in sales (at on ‘edit during the yeor that just ended. Whats the fern’ days sales oustanding (DSO)? Use 365 days as the length of 2 year in all ealeulotions. Q 60.92 dave 0 17.07 dave O 58.15 dovs © 55.38 davs ‘Atlantic Nathem Inc's CFO is unhappy with ts DSO ane wants to improve exllections next year. Saler are expected to grow by 15% naxt year, ané the CFO wants to lower the DSO tothe musty average of 20 days. Haw much acrounts receivable fs the hm expected to carry? Q satis Q 5452,280 O 5513.85 © 493,397 Chap 11 Cash Flow Estimation and Risk Analysis1. Concepts used in cashflow estimation [ Aye me ha A Cc t tie masckooet ieee eemcnbasieae TOA am annual basis On a monthly basi ences ‘eal, coptel budgeting analy sud take cash lows Into account Capital budgeting analysis often Involves decisions related to expansion projects andor replacement projects. Based ‘on your understanding of expansion and replacement projects, comelet the flloning ‘A rental cor company bought a new fleet of micsze cars and Sc of sold micsize cars because they Noe too many reles 00 them. whieh type of projeet woul thi be considered? Q Areplacement project Q Ancxpansion project Marston Manufacturing Co. owns 2 warchouse tha isnot curently using, It could se the warehouse fer $200,000 loruse the warehouse ina new praject. Shaw Marston Manufacturing Co ince the value ofthe warehouse as part ofthe intl investment in the new projec? Q No O ves ‘cell phone company recently gave customers the ability ta buy apications that they can dounload to their ce ‘phones, Allowing customers to use these opliations increased cell phone sales. Ths isan example of G farina aoe a positive eoittan - Reem an caAvivonmintel & negate witin —2. Anaysis ofan expansion project ke B orca Co. conisring an investment hat ml have the folowing sale, warable ets, nc ees operating est “This oroect wal rave an investment of $25,000 ln new eauipent. The court wil have ao sohoge value at he end of the rac’ four-year fe, Grids poys a constant tax rats of 4%, an thas a weighted average cost of eat (WCC o 11%, Determine what ne proc net present vale (NPV) oul be when using accelerated deprecation. Q sss026 O sssa12 Q s07028 O snsz Now determine what the profes NPV wou be when ung erlang eeprom. © 568,500 O sex707 © s72.105 © sazsu1 sng the “Zepresaton rthod wil reat the ighest NPV forthe projet. "No chor fre would take on thi projet Garda tsi own How much shod Gord reduce the NPV of hs project Hi lacovered tht this project would reues one of its esis net atest cash Rows by $400 for ech year of he fur year projet? Q wn O sis O size © s10ss 3 Inflation in project analysts me Ae ‘Sto Associates Co, is considering opening 2 new division to make Gadgets that it expects to sel a a pxce of $15,700 leach in the frst year of the project. The company expects the cost of producing each iGadget to be $7100 Inthe Ast ‘year; however, i expects the sell price and east per iGadget to increase by 3% each year. Based on this Information, complete the folowing table. 19 company doesnot take inflation into account when analyzing a project, the expected at present vale (NPV) of the projet il typically be than the Bue NPV of the project nae’ lower4. Risk analysts in capital budgeting aa @ Evolating ak isan important part ofthe capital budgeting process. Which ofthe folowing represents the eros jee hnessasunnanactissemerane een ATSE- adjusted coo of capital Stand-alone risk > marker risk rae Corpotake, or ws “he problem wth using hen ying to agus for projeas that re more ky er loss sky than afr average project ie that tess cjusiments are extremely subjective and iia to justly. Scenacio analog 3 Sener\ ayckys > Mears treasures the Berertoge chonpen the net present va (NPV that ress from 9 given percentage ange WLS othe apt votes wie al ther varabes are hed constant tthe expecte voles, Canaria anAlgsis CO (Sensitivity analysers i “ows rs thor ORE VOTED ame Toe change, on takes to acco the rabbis of changes the hy vob. © stane-atone rs Q Comarats or within frm, re © Maret, or beta, nek tain —Fiem, cise 5. Measuring stand-alone risk ua @ (6. within-firm and beta risk ha Aa \WS® In. i involves in 8 wide range of unvelted projects, The company wil pursue any project that thinks vl ‘ate valve forts stockolers, Consequently, the rk level ofthe company's projects tends to vary & grt deal from project to project IF WSP tne. does not isheadjust Rs dlscount rate for specie projects property, which ofthe folowing ls Mkely to occur ver time? Check al that apaty The frm wil become los ey. The firm wi make poor capital budgeting cisions that couléjeopacize the long-run abit ofthe The fr wil reject too many relatively safe projects. When a project involves an ently new product line, the frm may be able to obtain beta from 0 clewate 8 welghtes average coe of captal (WACC) fer ke new produc ine, dea cans vious projects Pure - serie veal a a eho om7 Anais 2 replacement project satin nedto detetey wot tne ove caret caren or rece the esometth nee cade {he coneony ni nest Go relacaert saa ttre wc pte be eng con re oy. Johnson Co. considering replacing an existing oece of eaioment ‘+The new equipment wll hve 9 cost of $1,200,000, an tl be Gapocated on 2 staight-ne boss over a pic of gt years (yea 1-8) 1+ Te ld machine is is ing depreciated cn a straigh-ne has. IRs 2 book vate of 200,000 (at yeu 0 and fut mote years of eeorelton lt ($50,000 in years I~. + The new equipment wl hve 9 s2haae value of $0 at the end of the projets Me (ver 6). The ‘lé machine hs 8 curet savage vlue (at year 0) of $300,000. + Replacing the kd machine wil require an investment in nt working capital (RWC) of $50,000 that wil be recovered a the end ofthe projets Me (year). +The new machine is more eft, 0 the incremental increase earings Before imerest an ‘aes (EST) eoutaent to an annual ncre35 of $700,000 forthe nee years yeas 1-8). + The pro's oat of coil is 12% + The companys annual ax ae 40%. Determine the net present value (NPV) of the rplacement project. © si61s.383 O s1s26.460 9 s1a73.076 O si2uss7 8, Introductiolite reat options: wn B Which type of real option allows a ren to shut down» project ts cash lows are lower thon experts? (© investment ting option 1 Gronth option © Abancenment option Wich type of ea opto allow the output sndjor Inputs inthe pcsiction process tobe altered, cepensing on hors ‘market conéRions change dung a project's ba? © tnvestinent tiring option O Alene option © Grown opeon © Abonconment option‘9. Investment timing options ms Aa the company uses 8 project cost of capital of 10%, what wil be the experteg net present value (NEV) of ths project ? Q -.218 Q -s2.879 O -+4.064 0 -#3.287 Coren Engineering Corp. has the option to celay starting this project for one year so that analysts can gather more Jeformation about whether demand ul be strong or weak IF the company chooses to delay the project, will Nave to give up a year of cashflows becaue if it lays the start ofthe proyect fora year, the project wil then be oly 2 ‘o-yeor project. However, the company Wil now for certain ithe market demand forthe project willbe strong or weak before deciding to las int. What wil be the expected NPV of the project f Corin Enginsering Corp. clays stating the project? O s72% 2 83,270 O 53,847 O 57,093 ‘What isthe value of Corian Engineering Corp.'s option to éelay the start ofthe project? [—]40, Growth options aa B & CConscer the cate of Markung’s Co. Markung’s Co.'s conseving 2 three-year projoct thot wil requrn an inl! Investment of $25,000, It has estimates ‘nat the sanust cash ows for the projet unser good conten vl be 450,000 sed 49,000 under bad conatins. ‘he fem bois that there Is 3 69% Chance of good concitions and a 40% chance of had conotons. I the fm 6 ‘sing 9 weighted average cott of capital of 13%, what wl b the expected net presen value (NOV) of te project? O s37.688 O s2z251 O s45,768 O s4azas Markus Co. wants te take a potential growth option into account when calling the projects expected NPV. It conditions are good, the frm will beable to invest $2,000 in year 2 to generate an ational eash Now of $15,000 in Year 2. IF conditions are bod, the frm wil nt ake any further investments in the project Using the information from the preceding problem, determine what the expected NPV ofthis project wll be when taking the erowth option inta occur Q sensz2 O H9.032 O $57,077 © ssa Wha te we of Mom's co‘ssromh tent [=] f G4 Ga 5,50211. Abandonment options make 2B ‘Acme Co's considering 2 four-yeor project that wil require an nil investment of $5,000. The base-case cash ows for this project are projected tobe $12,000 per yeor. The best-case cashflows are projected to be $20,000 per year {and th sorst-case cashflows ore projected to be ~51,000 per year. The company's analysts have estimates that ‘here 1¢'3 30% probabity thot the projet wl generate the base-cose cath floms, The analyst ako think that there ‘5 82596 probability of the project generating the best-case cash flows and 8 25%¢ probably ofthe projet generating the worst-case cashflows nat would bo the expects not present value (NPV) ofthis projoct the project’ ost of capt ls 12%? Q szaas7 O 527.082 O $31,800 2 29,035 fcrne now warts to take into account Its aby to abandon the project atthe end of year 2if the proect ends up generating the worst-case scenario cashflows. If decides to abondon the projet atthe end of yeer 2, the company vl recive a one-time net cash iow of $4,500 (atthe end of year 2). The $4,500 the cmpony recive atthe end of year 2 the diference between the cash the comoany receives from sling off the projets assets and the ‘cormpany’s “$1,000 cash outflow fram operations. Akitionaly it abandons te projec, the campany wll have no cash flows In years 3 and 4 ofthe projet. Using the information inthe prececing problem, find the expected NPV of ths projet whem taking the abandonment ontion inte account Q $34,902 © s29.085 Q 826,177 O s76s ‘What ithe value ofthe option to bandon the project? [+] Ls12. Flexibility options: ma BL ‘Sally Rubber Co. looking at investing in production facty that wil requle an fla investment of $800,000, The facity wil nave 0 three-yeoruseft Ae, and vl nt have ony salvage value atthe end ofthe project's Me, If ‘demand fe trong, the fcity wl beable to Generate annual cash ows of $260,000, but demand tans out to be weak, the fait vl generate annual cash Rows of only $125,000. Sally Rubber Co, thinks that there is 9 SO% hance that demand wl be strong and » 50% chance thot demand wll be weak lrthe company uses 2 project cost of capital of 119%, what wil be the expected net present value (NPV) ofthis project? O -s20585 O -s19.220 O 325.147 O -s20,710 Sally Rubber Co. could spend $510,000 to build the faity. Spending the action $10,000 on the faci il aoe the company to switch the products they produce inthe fact after the fst year of operation # demans tame out to be weak in year 1. 1f the company switches product lines because ef tom demas, wl be able to generate cash ows of $285,000 in yoars 2 ond 3 ofthe projet. What isthe expected NEV of this projet I Sally Rubber Co, dees to inveat the addtional $10,000 to ove themseheso exit option? Q 90,283 O e363 O 54.628, 2 560,698, ‘What wil be the value of Sally Rubber Ca.’ Nexbity option?