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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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- TWITTERCO has an opportunity to invest in two business initiatives: MUSK #1 & MUSK #2 Expected cash flow data for these two projects is shown below: M #1 M #2 -250 90 90 90 90 2022 2023 2024 2025 2026 -250 105 105 105 TwitterCo has a cost of capital for these projects of 11%. Calculate the NPV of these projects. Project M#1 NPV: Project M#2 NPV: Based on NPV, preferred is: If both projects can be undertaken, should they? If the projects are independent of each other, should they both be undertaken? If the projects are mutually exclusive of each other, should they both be undertaken?Bell Manufacturing is attempting to choosethe better of two mutually exclusive projects for expanding the firm’s warehousecapacity. The relevant cash flows for the projects are shown in the following table.The firm’s cost of capital is 15%. project X project Y initial investment 500000 325000 year cash inflow cash inflow 1 100000 140000 2 120000 120000 3 150000 95000 4 190000 70000 5 250000 50000 a. Calculate the IRR to the nearest whole percent for each of the projects. b. Assess the acceptability of each project on the basis of the IRRs found in part a. c. Which project, on this basis, is preferred? (solve using excel)Mustafa Inc. has three potential investment projects but can choose only one to invest in. Below is financial information on these projects: Project Investment Net Present Value 1 $300,000 $61,500 2 $325,000 $77,000 3 $215,000 $62,000 Use the profitability index, which project should the company choose?
- An entrepreneur has a project which generates the following (sure) cash flow stream: t=1 t=2 t=3 $20 $30 $40 in million dollars. The initial investment costs (at t=0) are $30million. In addition, the entrepreneur has to incur the following operating costs (in million dollars) to run the business in the subsequent periods: t=1 t=2 t=3 $10 $10 $10 The entrepreneur can borrow and save any amount at anydate at the one period interest rate r=12% from a bank. (a)Should the entrepreneur undertake the project? Suppose a private equity firm wants to buy the whole project (at t=0). Once the private equity firm owns the project it has to finance all costs (setup cost and operating costs) itself. (b) What is the minimum price at which the entrepreneur is willing to sell? (c)What is the maximum price the private equity firm is willing to pay?An entrepreneur has a project which generates the following (sure) cash flow stream: t=1 t=2 t%3 $20 $30 $40 in million dollars. The initial investment costs (at t=0) are $40 million. In addition, the entrepreneur has to incur the following operating costs (in million dollars) to run the business in the subsequent periods: t3D1 t32 t=D3 $10 $10 $10 The entrepreneur can borTow and save any amount at any date at the one period interest rate r-8% from a bank. (a) Should the entrepreneur undertake the project? (b) What is the minimum price at which the entrepreneur is willing to sell? (c) What is the maximum price the private equity firm is willing to pay?Andrew Oxnard, chief financial officer, has been asked by Harry Pendel, chief executive officer and co-founder of Pendel & Braithwaite, Ltd. (P&B), to analyze two capital investment projects (projects A and B), which are expected to generate the following profit (p)streams: Profit Streams for Projects A and B period ?? ($) ?? ($) 1 100,000 350,000 2 200,000 300,000 3 250,000 200,000 4 300,000 100,000 5 325,000 100,000 Total 1,175,000 1,050,000 Profits are realized at the end of each period. Assuming that P&B is a profit maximizer if the discount rate for both projects is 12%, which of the two projects should be adopted?
- You are considering a project which requires $250,000 in external financing. The flotation cost of equity is 7% and the flotation cost of debt is 2.5%. You wish to maintain a debt-equity ratio of 0.55. What is the initial cost of the project including the flotation costs? a. $235,720 b. $263,508 c. $264,280 d. $254,752 e. $255,784An entrepreneur has a project which generates the following (sure) cash flow stream: t=1 t=2 t=3 $20 $30 $40 in million dollars. The initial investment costs (at t=0) are $40 million. In addition, the entrepreneur has to incur the following operating costs (in million dollars) to run the business in the subsequent periods: t=1 t=2 t=3 $10 $10 $10 The entrepreneur can borrow and save any amount at any date at the one period interest rate r=8% from a bank. (a) Should the entrepreneur undertake the project? Suppose a private equity firm wants to buy the whole project (at t=0). Once the private equity firm owns the project it has to finance all costs (setup cost and operating costs) itself. (b) What is the minimum price at which the entrepreneur is willing to sell? c) What is the maximum price the private equity firm is willing to pay?Ross Enterprises can raise capital from the source below: Ross has a new project that has an estimated IRR of 12%, but will require an investment of $220,000. Should Ross borrow the money and invest in the new project? What is Ross's weighted average cost of capital (WACC) if it needs to raise $220,000? Source of Funds Interest Rate Borrowing Limit Small business bureau 5% $60,000 Bank loan 7% $50,000 Bond market 12% $60,000 Owner's equity (stock) 16% $90,000
- A soap manufacturing company is considering to diversify into alcohol business. It has decidedtoto set up an alcohol plant at a total cost of GHS 200 m. The project is to be financed as below:EquityGHS 75m12% DebtGHS 125mThe managing director of the company has asked the finance director to estimate the net presentvalue of the alcohol business using the discounted cash flow method. The finance director wasfacing problem in estimating cost of equity for the alcohol business. He collected informationwith respect to the beta (market risk) of a comparable alcohol company and found 0.90.However, the proposed alcohol company will be riskier than existing comparable firm since it will be highly levered. Thus, market risk of the proposed alcohol company will be 80% higherthan the existing comparable alcohol company. Requireda. Aid the finance director to estimate the cost of equity and hence the WACC for theproposed alcohol company. The tax rate for the companies is 35%. Use a risk-free…Better plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I did my own calculation but i dont get the same answer. For example for year 2 for project A you have 39.8597 How did you get to that without using the formula in excel. I need to write down the actual numbers. I got 22.3214 some im not sure how you got to that number. Can you help me please? Thank youBetter plc is comparing two mutually exclusive projects, whose details are given below.The company’s cost of capital is 12 per cent.Project A Project B£m £mYear 0 (150) (152)Year 1 40 80Year 2 50 80Year 3 60 50Year 4 60 40Year 5 80 30(a). Using the net present value method, which project should be accepted?(b). Using the internal rate of return method, which project should be accepted?(c). If the cost of capital increases to 20 per cent in year 5, would your advice change? Hello.i have the solution you send me but i am trying to understand where did you get the calculations for in the worknotes tabel. I still cant calculate the IRR.i really dont understand how to do it. Can you help me please by using the numbers in the tabel so i can understand what is that you are adding or taking away please? I know how to calculate the NPV but not the IRR. I have went over and over this IRR but i still dont understand how you calculate it using the pv and the npv.i dont wanna use excel.