Guillermo's could use, and what the optimal Weighted Average Cost of Capital (WACC) of each option will be presented along with techniques for reducing risks. There are many forms of capital budgeting models that can be used. Payback made simple, NPV, IRR, and Payback discounted. The payback period: The simple payback period can be defined as “the expected number of years required to recover the original investment.” (Emery 2007) For example, if Guillermo’s invest $300 million in one of its projects
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FIN303 Exam-type questions For Final exam Chapter 9 1. Stock A has a required return of 10 percent. Its dividend is expected to grow at a constant rate of 7 percent per year. Stock B has a required return of 12 percent. Its dividend is expected to grow at a constant rate of 9 percent per year. Stock A has a price of $25 per share, while Stock B has a price of $40 per share. Which of the following statements is most correct? a. The two stocks have the same dividend yield.
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000/4) x 35%] = $9,350 10. b 11. a Feedback: * If the required rate of return is 8% [pic] = $17,995.48 [pic] = $11,045.50 => At 8%, Project A has the higher NPV. * If the required rate of return is 11% [pic] = -$2,362.80 (Negative) [pic] = $1,682.28 => At 11%, Project B has the higher NPV. So, my choice is to select project A at 8% and project B at 11% 12. c 13. c Feedback: Tax = [$82,500 - $135,000 x (1 - .2 - .32 - .192)] x .34 = $14,830.80 14. c Feedback:
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thereafter determining the Net Present value (NPV) of each of the proposed project. The project proposal with the positive and highest NPV would be acceptable for investment. If the project has a positive NPV suggests that such a project is generating more cash than is required to service the debt and to provide the appropriate returns to the firm’s shareholders and this cash accrues solely to the firm’s shareholders. If the firm projects generate a negative NPV then the project is not feasible. New
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Case 3: Diamond Chemicals Diamond Chemicals operates two large polypropylene production plants, the Merseyside Works in England, and the other in Rotterdam, Holland. Diamond Chemicals’ plant manager Lucy Morris is currently examining a (British Pounds) 9 Million project to improve the plant, which has been under scrutiny for poor financial performance. Morris has assumed the responsibility of Merseyside Works, and has decided improvements need to be made. Although there is room for substantial
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Bryan Kimmell How do CFOs make capital budgeting and capital structure decisions? Introduction A comprehensive survey is gone that describes the current practice of corporate finance. The survey will give us a betting understanding of where the theory and practice of corporate finance are consistent and areas where they are not. The survey conducted is based on two parts, capital budgeting and capital structure. The survey goes deeper and tries to find out what causes capital budgeting and structure
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WEEK 2 NPV, PBP, IRR, EAC( equivalent annual cash flow) NPV: If NPV>0, accept the project [which are expected to add value to the firm], otherwise don’t bother. Reminders Rule 1: Only cash flow is relevant Cash flow ≠ accounting income •In an income statement, profit is shown as it is earned rather than when the company and its customers get around to paying their bills. •Cash outflows are sorted into two categories: 1) current expenses, deducted when calculating income; and 2)
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...................................................................................... 5 4.1 ARR ................................................................................................................................................ 6 4.2 IRR.................................................................................................................................................. 6 4.3 Limitations ....................................................................................
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apply and understand, and useful to compare with other investment plans. Third, the net present value (NPV) of free cash flow is positive. This criterion is calculated as the present value of future cash flows of the project less the initial investment outlay. It is a determinant of whether to undertake the project. A project with a positive NPV is believed acceptable. The higher the NPV, the better the project. Also, it is a good method to evaluate the project because it takes all the relevant
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favorable under NPV and IRR analysis! Project A 02. Annual revenues Annual operating costs System investment Project life $240,000 120,000 360,000 5 years Project B $300,000 160,000 420,000 5 years Question: If the cost of capital were 12% pa, which project will you recommend? Briefly explain your supporting calculation! Management Control System - TA Genap 1516 By: Natalis Christian, SE., MM. 1 Answer 01. Project A NPV = ((PVIF, 8%, 2 years) x $ 1,440,000) - $ 1,000,000 IRR = ((PVIF, ??%
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