decision-making process. The net present value method is one of the useful methods that help financial managers to maximize shareholders’ wealth. The capital budgeting decision mergers Acquisitions Net Present Value Financial managers are working for the shareholders and their primary goal is profit maximization in order to maximize the wealth of the company and the shareholders. The Capital budgeting decision focuses on the net present value method‚ the payback
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CHAPTER 2 How to Calculate Present Values Answers to Problem Sets 1. If the discount factor is .507‚ then .507*1.126 = $1 2. 125/139 = .899 3. PV = 374/(1.09)9 = 172.20 4. PV = 432/1.15 + 137/(1.152) + 797/(1.153) = 376 + 104 + 524 = $1‚003 5. FV = 100*1.158 = $305.90 6. NPV = -1‚548 + 138/.09 = -14.67 (cost today plus the present value of the perpetuity) 7. PV = 4/(.14-.04) = $40 8. a. PV = 1/.10 = $10 b. Since the perpetuity
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next 20 years starting one year from today and you earn interest of 10% per year‚ how much will you have at the end of the 20 years? b. How much must you invest each year if you want to have $50000 at the end of the 20 years? 3. What is the present value of the following cash flows at an interest rate of 10% per year? (Hints: don’t need to use the financial keys of your calculator‚ just dome common sense) a. $100 received five years from now b. $100 received 60 years from now
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outlay of $500 and will return $120 per year for the next seven years. Project B requires an initial outlay of $5‚000 and will return $1‚350 per year for the next five years. The required rate of return is 10%. What is the net present value of the project with the highest net present value? Which project should the firm
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(A) $840‚000 (B) $180‚000 (C) $135‚000 (D) $75‚000 4. Given an effective annual interest rate of 14 per cent‚ the present value of a perpetuity consisting of yearly payments of $25‚000 starting immediately is‚ rounded to the nearest dollar (A) (B) $203‚571 (C) $178‚571 (D) 5. $232‚071 $156‚641 If the present value of a perpetual income stream is increasing‚ the discount rate must be (A) (B) decreasing (C) increasing proportionally
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NET PRESENT‚ VALUE‚ MERGERS AND ACQUISTIONS TRIDENT UNIVERSITY INTERNATIONAL AVIE MARIE JOHNSTONE STRATEGIC CORPORATE FINANCE FIN501 MODULE 5 CASE ASSIGNMENT PROFESSOR WALTER WITHAM
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FIN 470 Exam1 - KEY 1. What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability‚ ease of transferability‚ ability to raise capital‚ and unlimited life. 2. Evaluate the following statement: Managers should not focus on the current stock value because doing
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for Rs. 8‚00‚000 by making a down payment of Rs.1‚50‚000 and remainder in equal instalments of Rs. 1‚50‚000 for six years. What is the rate of interest to the firm? 2. a.Explain the mechanism of calculating the present value of cash flows..What is annuity due? How can you calculate the present and future values of an annuity due? Illustrate b.”The increase in the risk-premium of all stocks‚irrespective of their beta is the same when risk aversion increases” Comment with practical examples 3. a.How
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company is willing to accept before starting a project. It is used in project evaluation to evaluate the amount of return on the project. A common method for evaluating the hurdle rate is apply the discounted cash flow method to the project‚ like net present value. 2. How does Teletech Corporation currently use the hurdle rate? They used it based on the firm’s rating‚ beta‚ cost of capital‚ and they calculated WACC of 9.3% for the whole corporation. 3. What are Rick Phillips’s arguments for
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assumes that inflow are reinvested at 80 percent of the internal rate of return This is a correct answer It is the difference in the reinvestment assumptions that can be significant in determining when to use the present value or internal rate of return methods. Under the net present value method‚ cash flows are assumed to be reinvested at the firm ’s weighted average cost of capital Points earned on this question: 1 Question 2 (Worth 1 points) A project has initial costs of $3‚000 and
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