EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 16, Problem 9P
a)
Summary Introduction
To determine: Expected rate of
b)
Summary Introduction
To discuss: Whether policy A is riskier or policy B is riskier.
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The Emu Manufacturing Company is considering five independent investment opportunities. The required investment outlays and expected internal rates of return (IRR) for these investments are shown below. The firm's cost of capital is 14% and its target optimal capital structure is a debt ratio of 30%. Internally generated funds totalling $900,000 are available for all investment opportunities.
(i) Based on the IRR method, which investment(s) should be accepted?
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Hampton Manufacturing estimates that its WACC is 12.5%.The company is considering the following 7 investment projects:
a. Assume that each of these projects is independent and that each is just as risky as thefirm’s existing assets. Which set of projects should be accepted, and what is the firm’soptimal capital budget?b. Now assume that Projects C and D are mutually exclusive. Project D has an NPV of$400,000, whereas Project C has an NPV of $350,000. Which set of projects should beaccepted, and what is the firm’s optimal capital budget?c. Ignore part b and assume that each of the projects is independent but that managementdecides to incorporate project risk differentials. Management judges Projects B,C, D, and E to have average risk, Project A to have high risk, and Projects F and G tohave low risk. The company adds 2% to the WACC of those projects that are significantlymore risky than average, and it subtracts 2% from the WACC of those projectsthat are substantially less risky than…
Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent. The firm's tax rate is 34 percent and its debt-equity ratio is 0.45. The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years. What is the net present value of the project
Chapter 16 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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