Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
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Textbook Question
Chapter 11, Problem 5Q
Suppose a firm estimates its overall cost of capital for the coming year to be 10%. What might be reasonable costs of capital for average-risk, high-risk, and low-risk projects?
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Suppose a firm estimates its overall cost of capital for the coming year to be10%. What might be reasonable costs of capital for average-risk, high-risk,and low-risk projects?
Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects?
Suppose a firm estimates its WACC to be 10 percent. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects?
Chapter 11 Solutions
Intermediate Financial Management
Ch. 11 - Define each of the following terms:
Weighted...Ch. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Distinguish between beta (i.e., market) risk,...Ch. 11 - Suppose a firm estimates its overall cost of...Ch. 11 - 11-1 After-Tax Cost of Debt
Calculate the...Ch. 11 - Cost of Preferred Stock
Duggins Veterinary...Ch. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6P
Ch. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Calculation of gL and EPS Spencer Suppliess stock...Ch. 11 - The Cost of Equity and Flotation Costs
Messman...Ch. 11 - Prob. 14PCh. 11 - WACC Estimation
On January 1, the total market...Ch. 11 - During the last few years, Jana Industries has...Ch. 11 - What is the market interest rate on Jana’s debt,...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 10MCCh. 11 - Prob. 11MCCh. 11 - What procedures can be used to estimate the...Ch. 11 - Prob. 13MCCh. 11 - Prob. 14MCCh. 11 - What four common mistakes in estimating the WACC...
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- Calculate the cash flows for each year. Based on these cash flows and the average project cost of capital, what are the projects NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?arrow_forwardThe internal rate of return (IRR) on a project is the average annual rate of return provided by investing in the project. A. Explain this thoroughly. B. Give some example if you have any idea.arrow_forwardTreynor Industries is investing in a new project. The minimum rate of return the firm requires on thisproject is referred to as the:Select one:a. Internal rate of return.b. Expected return.c. Market rate of return.d. Cost of capital.e. Average arithmetic returnarrow_forward
- The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…arrow_forwardWhat is the formula for calculating present value of a project? If you are given annual profit in perpetuity, initial cost, tax rate, unlevered cost of equity, and how much of the project cost is finance through debt?arrow_forwardInternal rate of return For the project shown in the following table, calculate the internal rate of return (IRR). Then indicate, for the project, the maximum cost of capital that the firm could have and still find the IRR acceptable.arrow_forward
- A company is considering a project that has the following cash flows: C0 = -5,000, C1 = +900, C2 = +2,500, C3 = +1,100, and C4 = +2,900 with a risk-adjusted discount rate of 12%. Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, and the Payback of this project. If you were the manager of the firm, will you accept or reject the project based on the calculation results above?arrow_forwardProfitability index. Given the discount rate and the future cash flow of each project listed in the following table, , use the PI to determine which projects the company should accept. ..... What is the Pl of project A? (Round to two decimal places.)arrow_forwardIf the appropriate interest rate to use when evaluating potential project for the firm is 10%, what is the present value of these cash flows?arrow_forward
- Consider the relationship between a project’s net present value (NPV), its internal rate of return (IRR), and a company’s cost of capital. For each scenario that follows, indicate the relative value of the unknown. If cost of capital is unknown, indicate whether it would be higher or lower than the stated IRR. If NPV is unknown, indicate whether it would be higher or lower than zero. Project 1 is shown as an example.arrow_forwardWhich of the following statements is true? The internal rate of return is the rate of return of an investment project over its useful life. When the net cash inflow is the same every year for a project after the initial investment, the internal rate of return of a project can be determined by dividing the initial investment required in the project by the annual net cash inflow. This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return. Multiple Choice Only statement I is true. Only statement II is true. Both statements are true.arrow_forwardUsing a MARR of 12%, find the external rate of return (ERR) for the following cash flow. Is this project economically attractive?arrow_forward
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