PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 19, Problem 18PS
Summary Introduction
To discuss: Whether the approach of the treasurer is wrong or right and whether the university should invest and borrow and the value of the project.
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Students have asked these similar questions
Ross Enterprises can raise capital from the source below: Ross has a new project that has an estimated IRR of 12%, but will require an investment of $220,000. Should Ross borrow the money and invest in the new project?
What is Ross's weighted average cost of capital (WACC) if it needs to raise $220,000?
Source of Funds
Interest Rate
Borrowing Limit
Small business bureau
5%
$60,000
Bank loan
7%
$50,000
Bond market
12%
$60,000
Owner's equity (stock)
16%
$90,000
A corporation is considering two mutually exclusive projects. Both projects require the same
investment, but have different patterns of cash-inflow. The cash-flows are shown below for years 1
to 7. All cash-flows are in thousands of dollars. The corporation applies a 10% discount rate.
Project Number
2
Initial Investment -2,000 -2,000
Time
1
2
W N
3
4
5
1
6
7
1200
900
300
90
70
-350
-60
60
350
700
1200
2250
1. Rank the projects by Payback Period, Discounted Payback Period, NPV, Profitability Index
and IRR.
2. At what discount rate will Project 1 and Project 2 have the same NPV?
.Assume you are the chief financial officer at Lehman Memorial Hospital. The CEO has asked you to analyze two proposed capital investment Project X and project Y each project requires a net investment outlay of $12,000 and the opportunity cost of capital for each project is 14% the project's expected net cash flows are as following
Year
Project x
Project Y
0
(12,000)
(12,000)
1
6,600
3,500
2
3,500
3,500
3
3,500
3,500
4
3,500
3,500
Calculate each project’s payback, NPV and IRR.
Which project is financially acceptable? Explain
Chapter 19 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 19.A - The U.S. government has settled a dispute with...Ch. 19.A - You are considering a five-year lease of office...Ch. 19 - WACC True or false? Use of the WACC formula...Ch. 19 - WACC The WACC formula seems to imply that debt is...Ch. 19 - Prob. 3PSCh. 19 - Prob. 4PSCh. 19 - WACC Whispering Pines Inc. is all-equity-financed....Ch. 19 - WACC Table 19.3 shows a book balance sheet for the...Ch. 19 - WACC Table 19.4 shows a simplified balance sheet...Ch. 19 - Prob. 8PS
Ch. 19 - WACC Nevada Hydro is 40% debt-financed and has a...Ch. 19 - Flow-to-equity valuation What is meant by the...Ch. 19 - APV True or false? The APV method a. Starts with a...Ch. 19 - APV A project costs 1 million and has a base-case...Ch. 19 - APV Consider a project lasting one year only. The...Ch. 19 - APV Digital Organics (DO) has the opportunity to...Ch. 19 - Prob. 17PSCh. 19 - Prob. 18PSCh. 19 - Prob. 19PSCh. 19 - Prob. 20PSCh. 19 - Prob. 22PSCh. 19 - Company valuation Chiara Companys management has...Ch. 19 - Prob. 26PSCh. 19 - Prob. 27PS
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