Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth - $50 or +$40. The cost of capital is 12% for all securities.
1. Calculate the
2. What will happen to the value of the firm if the new project is undertaken?
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- 2. Assume that today is December 31, 2021 and you need to determine the firm value of CoolTech, Inc. You have decided to apply the free cash flow valuation model to the firm's financial data that you've developed from a variety of data sources. The key values you have compiled are summarized in the following table: Free Cash Flow Year FCF Other Data Growth rate of FCF, beyond 2025 to infinity = 3% Weighted average cost of capital = 8% 700,000 800,000 950,000 980,000 2022 %3D 2023 %3D 2024 2025 What is the value of the entire CoolTech's entire company? + Factac F%arrow_forwardA software company Future PLC can invest in either Project C orProject D which have the same initial Year = 0 cost of £275mlm and cash-flows: Project C: £150mln (in Year=1), £250mln (in Year=2)Project D: perpetuity of £25mln (in Year=1) growing at an annual rateof g=7% The problem is, that the firm does not know the risk-adjusted discount rateof Project C but it does know that the cash flow betas are 55 (in Year=1) and 85 (in Year=2). It also knows that Project D has the same risk as a market portfolio, which has an annual return of rm = 15%. Risk-free treasury bonds have an annual return of rf = 5%. Which project should be chosen by the firm?arrow_forwardYour corporate division had the following net cash flows: Assume that the risk-free rate is 1% per annum and the equity premium is 3%. Use the certainty equivalence concept to answer the following questions: What should be a reasonable value approximation for this corporate division? What should be the cost of capital for this corporate division?arrow_forward
- An all equity financed company is considering an independent project with an internal rate of return (IRR) of 11%. Assume the market risk premium is 6% and risk free rate is 3%. The beta of the company's stock is 1.4. Using the Capital Asset Pricing Model (CAPM), the company should accept this project. Question options: a) True b) Falsearrow_forwardSolve this question pleasearrow_forwardWhich of the following statements is correct? Multiple Choice If you can borrow all of the money you need for a project at 5%, the cost of capital for the project is 5%. The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds. A firm's weighted-average cost of capital is the correct discount rate to use for all projects undertaken by the firm. None of the options are correct.arrow_forward
- A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: Time Cash Flow Cash Flow Y C $95,000 -$70.000 35,000 40.000 55,000 40,000 3 60.000 40.000 40.000 10.000 9% , what is the EAA of the project that adds the most value to the firm? Do not round intermediate calculations, Round vour answer Proiects and Y are equally risky and may be reneated indefinitely, If the firm's WACC. the nearest dollar , whose EAA -s Choose Project -Select-arrow_forwardCan you please answer this part c follow up question: c) Suppose the initial £90,000 is raised by borrowing at the risk-free interest rateinstead of issuing equity. What are the cash flows to equity and debt holders, andwhat is the initial value of the levered equity according to Modigliani and Miller’sPropositions? Is the company’s cost of equity the same as before? Overall, can thecompany raise the same amount of capital as before? Explain your reasoning.arrow_forward**Please solve using Excel and show formulas. Epsilon Corp. is evaluating an expansion of its business. The cash-flow forecasts for the project are as follows: Years Cash Flow($ millions) 0 −170 1-11 45 The firm's existing assets have a beta of 2.1. The risk-free interest rate is 3% and the expected return on the market portfolio is 14%. What is the project's NPV? (Enter your answer in millions. A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV= ___ millionarrow_forward
- A firm is considering two mutually exclusive projects, X and Y, with the following cash flows: 0 1 2 3 4 Project X -$1,000 $110 $320 $370 $700 Project Y -$1,000 $900 $110 $50 $50 The projects are equally risky, and their WACC is 9%. What is the MIRR of the project that maximizes shareholder value? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwardA firm has the following investment alternatives (refer to image): Each investment costs $3,000; investments B and C are mutually exclusive,and the firm’s cost of capital is 8 percent. a.) According to the internal rates of return, which investment(s) should the firm make? Why? b.) According to both the net present values and internal rates of return, which investments should the firm make? c.) If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part b? Would the answer be different if the rate were 14 percent?arrow_forwardYou are a consultant to a firm evaluating an expansion of its current business. The cash-flow forecasts (in millions of dollars) for the project are as follows: Years Cash Flow 0 – 100 1-10 + 17 On the basis of the behavior of the firm’s stock, you believe that the beta of the firm is 1.44. Assuming that the rate of return available on risk-free investments is 5% and that the expected rate of return on the market portfolio is 11%, what is the net present value of the project?arrow_forward
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