PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 18, Problem 16PS
Agency costs The possible payoffs from Ms. Ketchup’s projects (see Example 18.1) have not changed but there is now a 40% chance that project 2 will pay off $24 and a 60% chance that it will pay off $0.
- a. Recalculate the expected payoffs to the bank and Ms. Ketchup if the bank lends the present value of $10. Which project would Ms. Ketchup undertake?
- b. What is the maximum amount the bank could lend that would induce Ms. Ketchup to take project 1?
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The NPV and payback period
What information does the payback period provide?
Suppose ABC Telecom Inc.’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.
Year
Cash Flow
Year 1
$350,000
Year 2
$500,000
Year 3
$500,000
Year 4
$400,000
If the project’s weighted average cost of capital (WACC) is 10%, what is its NPV?
$280,268
$224,214
$252,241
$322,308
Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply.
The discounted payback period does not take the project’s entire life into account.
The discounted payback period is calculated using net income instead of cash flows.
The discounted payback period does not take the time value of money into account.
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Data table
You are choosing between two projects. The cash flows for the projects are given in the following table ($ million):
a. What are the IRRS of the two projects?
b. If your discount rate is 4.6% what are the NPVS of the two projects?
c. Why do IRR and NPV rank the two projects differently?
a. What are the IRRS of the two projects?
The IRR for project A is ☐ %. (Round to one decimal place.)
(Click on the following icon in order to copy its contents into a spreadsheet.)
Project
A
Year 0
- $49
Year 1
$24
B
- $99
$18
Year 2
$21
$40
Print
Done
Year 3
Year 4
$19
$14
$50
$61
Consider projects A and B with the following cash flows:
Ce
$32
57
$16
+$16
+ 32
+$ 16
32
a-1. What is the NPV of each project if the discount rate is 12%? (Do not round intermediate calculations. Round your answers to 2
decimal places.)
6-2. Which project has the higher NPV?
b-1. What is the profitability Index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal
places.)
b-2. Which project has the higher profitablity index?
c. Which project is most attractive to a firm that can ralse an unlimited amount of funds to pay for its investment projects?
d. Which project is most attractive to a firm that is limited in the funds it can ralse?
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Project A
Project B
a-1. NPV of ench project if the discount rate is 12%
a-2. Which project has the higher NPV?
b-1. Profitability index of each projoct
b-2. Which project has the higher protitability index?
Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for…
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Here are book and market value balance...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Prob. 5PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Prob. 7PSCh. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Bankruptcy costs On February 29, 2019, when PDQ...Ch. 18 - Financial distress This question tests your...
Ch. 18 - Prob. 12PSCh. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 20PSCh. 18 - Pecking-order theory Fill in the blanks: According...Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Financial slack True or false? a. Financial slack...Ch. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 26PSCh. 18 - Trade-off theory The trade-off theory relies on...
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