A venture capital fund is considering investing in a startup that is seeking toraise $1,500,000 in equity capital. The venture had previously raised$250,000 from angel investors and the founder had invested $50,000 of hersavings in her venture. At the time this investment was under consideration,the company was projecting to be profitable three years from now. Net incomein year three is projected to be $225,000. Because of projected losses in yearone and two, cumulative retained earnings entering year three are projected tobe negative $120,000. The venture capital firm will not invest unless theprojected return on equity in year three is at least 30%If you were employed by the venture capital fund, based on this informationalone, would you recommend that the $1,500,000 investment be made?Yes, the projected return on equity in year three is greater than 30%No, the projected return on equity in year three is less than 30%

In the context of the given question, we can see a venture capital fund is considering investing in…

Answered: A venture capital fund is considering…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

See similar textbooks

Similar questions

Farmers Alliance Limited is considering investing in new equipment with the initial cost of project/investment to be $100,000. This project is expected to generate EBIT of $15,000 per year forever (perpetuity). This project or investment can be financed either with $100,000 in equity (assume from internally generated fund) or with $40,000 of debt and $60,000 equity. The shareholders required return on an all equity financed project in this risk class is 10%. The firm's marginal tax rate is 40%. The cost of any debt is 5% before taxes. Note that in the world of Modigliani & Miller, all cash flows are perpetual and debt does not mature.Required: (iii) Use the weighted average cost of capital method to value the project. What is the value of equity? What is the value of debt?
You are thinking about investing $4,692 in your friend's landscaping business. Even though you know the investment is risky and you can't be sure, you expect your investment to be worth $5,738 next year. You notice that the rate for one-year Treasury bills is 1%. However, you feel that other investments of equal risk to your friend's landscape business offer an expected return of 8% for the year. What should you do?.
Mrs Alis is an intelligent business woman. She makes her investments after a very thoughtful process. In January 2018 , her manager has shown her some projects with the following details Option A Investment into a towel business that initially cost $200,000 and then will generate cash inflow of $24000 per year for the next 10 years Option B Investment into a detergent business that initially cost $190,000 and then will generate cash inflow of $20,000 for each of next 12 years. The rate of return associated with both the investments is 12%. Calculate net present value (NPV) and internal rate of return (IRR) of both the investments. Comment on which investment Mrs Alis should pick on the basis NPV and IRR.
Suppose you have just become the president of J&J and the first decision you face is whether Co go ahead with a plan to renovate the company's Al systems. The plan will cost the company $60 million, and it is expected to save $15 million per year after taxes over the next five years. The firm sources of funds and corresponding required rates of return are as follow: $5 million common stock at 16%, $800,000 preferred stock at 12%, $6 million debt at 7%. All amounts are listed at market values and the firm's tax rate is 30%. You are the financial manager and supposed to calculate the NPV. What's the NPV? Do you recommend taking the project? ง = O NPV $5.167 Millions; I'll recommend the owners to take the project. O NPV=-$1.720 Millions; I'll tell the owners not to take the project. NPV = $4.562 Millions; I'll tell the owners not to take the project. O NPV=-$8.098 Millions; I'll tell the owners not to take the project.
Debby's Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $15,500. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby's cost of capital is 13 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. Cash Flow $ 4,390 5,110 8,240 10,000 Probability 0.3 0.2 0.3 0.2 a. What is the expected value of the cash flow? The value you compute will apply to each of the five years. Expected cash flow b. What is the expected net present value? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. Net present value
You are the owner of a graphic design firm that has a number of high-end clients. Your business started up last year and is financed by three angel investors. Your initial pro forma showed that you were going to be very profitable and return a maximum of $5 million to the angel investors within five-to-six years. The angel investors expect a return of 14 percent on their investment and originally invested $1 million in your startup. At this rate, the net present value (discounted cash flow of the future returns) was $3.8 million (Present Value of future discounted cash flows). Q2. After the first year, “so far so good,” you have signed on some new clients that show great potential and met the targets of your scorecard. That said, it looks like you will have to expand staff and buy some high-end equipment to satisfy the needs of the new clients. You estimate you will need an additional $2.2 million from investors to carry you through the next two years. With the new investments and…
Your plans to invest $200 million in two (2) projects. The first project you are contemplating is to a restaurant and sports bar and the second is to invest in a hardware store. The problem is that you have never been one to stay with and project for too long, so you figure that your time frame is five years. Your target capital structure is 40% debt, 10% preferred stock and 5-% common stock. The interest rate on new debt securities is 8, the yield on preferred stock is 10%, the cost of retained earnings is 15% and the tax rate is 30%. i) Compute the project’s cost of capital. NB. Do not use excel to show answers, show all working to show how we arrive at the answer.
The firm is considering replacing their computer system. The incremental cash flow from assets for this project are an $80,000 initial investment and and the expected cash flows are $36,000 per vear for the next 3 years. Based on the IRR, should you accept or reject the project? Note: You have already calculated the WACC in the previous question. This is here as a reference in case you need it: Bluefield Corporation has 6 million shares of common stock outstanding, 600,000 shares of preferred stock that pays an annual dividend of $8, and 200,000 bonds with a 10 percent coupon (semiannual interest) and 20 years to maturity. At present, the common stock is selling for $50 per share, the bonds are selling for $950.62 per $1,000 of face value, and the preferred stock is selling at $74 per share. The estimated market return is 13%, the risk free rate is 8%, and Bluefield's beta is 1.4. Bluefield's tax rate is 30 percent. Short Answer Toolbar navigation BIUS E = E E E E
CorpCo is a large manufacturing firm with many stockholders. The firm is considering investing $300,000 for a period of five years. Expected earnings are $50,000 in year 1, $60,000 in year 2, $75,000 in year 3 and $90,000 in years 4 and 5. Should the firm decide to invest, if the interest rate is 8%?
As part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Expanding Economic economy recession Stock market investment Commodity investment 30 5 -10 20 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ commodities $

Recommended textbooks for you

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

FINANCIAL ACCOUNTING

Accounting

ISBN:

9781259964947

Author:

Libby

Publisher:

MCG

Accounting

ISBN:

9781337272094

Author:

WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.

Publisher:

Cengage Learning,

Accounting Information Systems

Accounting

ISBN:

9781337619202

Author:

Hall, James A.

Publisher:

Cengage Learning,

Horngren's Cost Accounting: A Managerial Emphasis…

Accounting

ISBN:

9780134475585

Author:

Srikant M. Datar, Madhav V. Rajan

Publisher:

PEARSON

Intermediate Accounting

Accounting

ISBN:

9781259722660

Author:

J. David Spiceland, Mark W. Nelson, Wayne M Thomas

Publisher:

McGraw-Hill Education

Financial and Managerial Accounting

Accounting

ISBN:

9781259726705

Author:

John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS