per annum compounded semi-annually will grow to what amount at the end of three years? (A) (B) $251.94 (C) $380.75 (D) 2. $158.80 $253.06 Bill plans to fund his individual retirement account with the maximum contribution of $2‚000 at the end of each year for the next 20 years. If Bill can earn an effective return of 12 per cent per annum on his contributions‚ how much will he have accumulated at the end of twenty years‚ rounded to the nearest dollar? (A) (B) $19
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8. Year 0 Year 1 Year 2 Taxable income $9‚100 $10‚250 $15‚300 Marginal tax rate .30 .30 .30 Tax $2‚730 $3‚075 $4‚590 Revenue $13‚000 $16‚250 $23‚400 Expenses (4‚250) (8‚000) (8‚100) Tax cost (2‚730) (3‚075) (4‚590) Net cash flow $6‚020 $5‚175 $10‚710 Discount factor (6%) .943 .890 Present value $6‚020 $4‚880 $9‚532 NPV $20‚432 11. a. Year 0 Year 1 Year 2 Year 3 Year 4 Before-tax cash flow $(500‚000) $52‚500 $47‚500 $35‚500 $530‚500 Tax cost (7‚875)
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recapitalizations. Fair market value of the firm: Rm: Prime rate = 9% rf: risk free rate = 7.2% Average Unleveraged beta bu = = .839 Assume that growth rate : g = 2%‚ RPm = 4% ‚ tax rate is 35% Unlevered cost of equity rsu = rf + RPm (bu) = 7.2% + 4%(.839) = 10.56% Operating cash flow using base case projections: 1995 1996 1997 1998 1999 Cash Flow 7‚772 9‚233 9‚807 10‚292 10‚513 Interest Expenses 3‚587 3‚042 2‚324 1‚507 599 Interest * Tax rate 1255.45 1064.7 813.4 527.45 209
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CHAPTER 26 NAME 10-MINUTE QUIZ A SECTION #___________________ Indicate the best answer for each question in the space provided. 1 Which of the following is not a capital budgeting decision? a Whether to acquire a subsidiary company. b Whether to expand a product line. c Whether to fill a special order. d Whether to purchase a fleet of trucks. 2 Which of the following is an example of a nonfinancial consideration in capital budgeting? a Will an investment generate adequate cash flows to promptly
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special account that will give you $500‚000 on your 35th birthday. Assuming you are age 21 (thus 14 years from receiving this)‚ what is the present value of this gift if the appropriate discount rate is 8.0%? (Ch5) a. $170‚231 b. $282‚449 c. $442‚619 d. $191‚206 e. $734‚664 2. You need $10‚900 for the down payment on a new car. You presently have $5‚000 in savings for which you expect to earn 6% (annual rate‚ compounded monthly). If you deposit a further $500 each month to this account‚ how long‚ approximately
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(qualitatively) to value AirThread. Should Ms. Zhang use WACC‚ APV or some combination thereof? Explain. (2 points) * From the statement of AirThread case‚ we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cash flows or assets of AirThread. * In another word‚ it’s a highly levered transaction using a fixed WACC discount rate; however the leverage
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to introduce discounted cash flow valuation techniques in a cross-border setting. Groupe Ariel’s Mexican subsidiary is proposing the purchase and installation of some cost-saving equipment in its plant in Monterrey. The headquarters at Ariel requires a discounted cash flow analysis and an estimated net present value for expenditures of this magnitude. The issue is whether the analysis should be performed in euros or pesos. Relevant cash flows and appropriate discount rates are the focus in this introduction
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of expansion. It is considered as a big issue for companies as an IPO does not necessary guarantee the success of a company as it is merely a tool of raising capital while its costs of issuance and consecutive monitoring costs (due to diluted shareholdings of the company by public investors) are relatively higher than the cost of issuing corporate debt. Yet IPO is still a popular tool for infant firms due to the fact it creates strategic market exposure. JetBlue was attempting to issue an IPO in 2002
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Need to consider what types and which cash flows should be included in capital budgeting analysis. D&D was producing and marketing two major product lines: 1. Lift-Off: Low –suds‚ concentrated powder. 2. Wave: Traditional powder detergent. Questions & Answers: 1. If you were in Steve Gasper’s place‚ would you argue to include the cost from market testing as a cash outflow? If I’m Steven Gasper’s I would not include the cost from market testing as a cash outflow. The reason
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in time. Since we will need to estimate the discount rate any time the capital structure changes‚ neither WACC nor APV would be reliable alone. Therefore‚ Ms. Zhang should use the combination of WACC and APV methods. As stated above‚ ACC will use the Leverage buy out (LBO) approach‚ which means that the debt to equity ratio of AirThread will not be the same from 2008 to 2012‚ so APV approach would be more suitable to valuate the cash flows between 2008 and 2012. After 2012‚ AirThread will de-lever
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