Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 7CRCT
Summary Introduction
To discuss: On the meaning of the saying that the proposed merger would make use of the existing economies of scale and the reason for considering a merger in the given situation.
Introduction:
The economies of scale is the average cost for one unit of manufacturing the goods and services.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
13. The replacement chain approach - Evaluating projects with unequal lives
Aa Aa
Evaluating projects with unequal lives
Your company is considering starting a new project in either France or Mexico-these projects are mutually exclusive, so your boss has asked
you to analyze the projects and then tell her which project will create more value for the company's stockholders.
The French project is a six-year project that is
The Mexican project is only a three-year project; however, your
expected to produce the following cash flows:
company plans to repeat the project after three years. The
Mexican project is expected to produce the following cash flows:
Project:
French
Year 0:
-$650,000
Project:
Mexican
Year 1:
$220,000
Year 0:
-$475,000
Year 2:
$240,000
Year 1:
$225,000
Year 3:
$245,000
Year 2:
$235,000
Year 4:
$270,000
Year 3:
$255,000
Year 5:
$120,000
Year 6:
$100,000
Because the projects have unequal lives, you have decided to use the replacement chain approach to evaluate them. You…
4. Interest rate parity
The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better
technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk.
This multimarket presence exposes companies to different kinds of risk as well-for example, political risk and exchange rate risk.
The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:
An American investor is considering investing $1,000 in default-free 90-day Japanese bonds that promise a 4% annual nominal return.
• The spot exchange rate is ¥101.12 per dollar.
• The 90-day forward exchange rate is 100.25 per dollar.
The investor's annualized return on these bonds-if he or she can lock in the dollar return by selling the foreign currency in the forward market-will
be…
1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is
looking at setting up a new manufacturing plant in South
Park to produce garden tools. The company bought some
land six years ago for $3.6 million in anticipation of using it
as a warehouse and distribution site, but the company has
since decided to rent these facilities from a competitor
instead. If the land were sold today, the company would net
$4.1 million. The company wants to build its new
manufacturing plant on this land; the plant will cost $18.1
million to build, and the site requires $950,000 worth of
grading before it is suitable for construction. What is the
proper cash flow amount to use as the initial investment in
fixed assets when evaluating this project? Why?
Chapter 26 Solutions
Fundamentals of Corporate Finance
Ch. 26.1 - Prob. 26.1ACQCh. 26.1 - Prob. 26.1BCQCh. 26.2 - Prob. 26.2ACQCh. 26.2 - Prob. 26.2BCQCh. 26.3 - Prob. 26.3ACQCh. 26.3 - Prob. 26.3BCQCh. 26.4 - Prob. 26.4ACQCh. 26.4 - Prob. 26.4BCQCh. 26.5 - Prob. 26.5ACQCh. 26.5 - Prob. 26.5BCQ
Ch. 26.6 - Prob. 26.6ACQCh. 26.6 - Prob. 26.6BCQCh. 26.7 - Prob. 26.7ACQCh. 26.7 - Prob. 26.7BCQCh. 26.8 - Prob. 26.8ACQCh. 26.8 - Prob. 26.8BCQCh. 26.9 - Prob. 26.9ACQCh. 26 - Prob. 26.3CTFCh. 26 - What factors should be considered when deciding...Ch. 26 - Prob. 1CRCTCh. 26 - Prob. 2CRCTCh. 26 - Prob. 3CRCTCh. 26 - Prob. 4CRCTCh. 26 - Prob. 5CRCTCh. 26 - Prob. 6CRCTCh. 26 - Prob. 7CRCTCh. 26 - Prob. 8CRCTCh. 26 - Prob. 9CRCTCh. 26 - Prob. 10CRCTCh. 26 - Prob. 1QPCh. 26 - Prob. 2QPCh. 26 - Prob. 3QPCh. 26 - Prob. 4QPCh. 26 - Prob. 5QPCh. 26 - Prob. 6QPCh. 26 - Prob. 7QPCh. 26 - Prob. 8QPCh. 26 - Cash versus Stock as Payment [LO3] In the previous...Ch. 26 - Prob. 10QPCh. 26 - Prob. 11QPCh. 26 - Prob. 12QPCh. 26 - Prob. 13QPCh. 26 - Prob. 14QPCh. 26 - Prob. 1MCh. 26 - Prob. 2MCh. 26 - Prob. 3MCh. 26 - Prob. 4M
Knowledge Booster
Similar questions
- [EXCEL] Net present value: Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for production system projects, in which system should the firm invest? Please use excel. Year System 1 System 2 0 −$15,000 −$45,000 1 15,000 32,000 2 15,000 32,000 3 15,000 32,000arrow_forwardIn theory, the arbitrage opportunity does not exist. However, with the new technologies and increased globalization, could arbitrage opportunity exist in some new ways?arrow_forwardFIN 6020 v19f Perez Company: Mutually Exclusive Projects with Different Lives. Ch 10 (10-17) Again, you are considering two mutually exclusive projects. Machine A: This project costs $10 million. The expected net cash flows are $4 million per year for 4 years, when is to be replaced. Machine B: It costs $15 million, and has expected cash flows of $3.5 per year for 8 years, when it will be replaced. The cost of capital is 10%. Machine prices are expected to stay steady as production efficiencies are expected to offset inflation. Evaluate these projects. a. Calculate NPV, IRR, Replacement Chain, and Equivalent Annual Annuity. b. Which project should be company accept?arrow_forward
- When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain. (See Ch 12, Q4)arrow_forwardAssume Country X has an electricity market with supply and demand being given below: Qp = -Pp + 200 Qs = -3Ps + 300 Part C- horizontally-integrated market If the government decides to reform the electricity market so that there are a number of power plant firms as well as a number of electricity distribution firms. The electricity market will now be controlled by a regulator using an auction system. A sample of the bids is given by the table below: Electricity Producers Electricity Distribution Asking price / KWh quantity/KWh Asking price / KWh quantity/KWh 0.74 25 0.56 30 0.32 20 0.34 60 0.46 35 2$ 0.55 25 0.53 25 0.64 25 0.64 30 2$ 0.43 40 By studying the bids, 1· Find the range of the equilibrium market price 2. Find the equilibrium market quantity 3. Find the total welfarearrow_forward21. Cost-Cutting Proposals [LO2] Tanaka Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $445,000 is estimated to result in $160,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $40,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an additional $2,800 in inventory for each succeeding year of the project. If the shop's tax rate is 22 percent and its discount rate is 9 percent, should the company buy and install the machine press?arrow_forward
- n 23 FDI may involve mergers with and acquisitions of existing foreign businesses. Select one: O True O False Đut of in n24 From the perspective of the writer of a put option written on C52,500. If the strike price is $1.25/e, and the option premium is $2,625, at what exchange rate do you start to lose money? out of in Select one: O a $122/e Ob $1.20/c O . SL30/e O d $1.52/earrow_forwardThe competitive advantage opportunities that a global competitor can gain by dispersing performance of its activities across many nations include all of the following, EXCEPT Question 21 options: being able to shift production from one country to another to take advantage of exchange rate fluctuations, differing wage rates, differing energy costs, or differing trade restrictions being in better position to choose where and how to challenge rivals. shortening delivery times to customers by having geographically scattered distribution facilities. centralizing value chain activities to foster just-in-time inventory activities.arrow_forward28 A company has four mutually exclusive investment opportunities, each one yielding different profits depending on the state of the market. There are three possible market states which could arise. The probability of each of these states, together with the incremental profits from each project, are shown in the following pay-off table. Market State Good Average Bad Probability 0.2 0.5 0.3 Investment Opportunity $000 $ 000 $000 North 100 80 60 South 120 90 60 East 80 60 40 60 40 20 West If the company wishes to maximise expected profits, which one of these projects should be undertaken? [ ] North B 1 South C [ ] East Westarrow_forward
- Inflation and Exchange Rates [LO2] Suppose the current exchange rate for the Polish zloty is Z 3.91. The expected exchange rate in three years is Z 3.98. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rate is constant for both countries. What relationship are you relying on in answering?arrow_forwardMake or Buy Analysis [LO 7–3]“In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $18 per drum, we would be paying $5 less than it costs us to manufacture the drums in our own plant. Since we use 60,000 drums a year, that would be an annual cost savings of $300,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 60,000 drums per year): Direct materials............................................$10.35 Direct labor ...............................................6.00 Variable overhead .........................................1.50 Fixed overhead ($2.80 general company overhead, $1.60 depreciation and, $0.75 supervision) ....... 5.15 Total cost per drum ........................................$23.00 A decision about whether to make or buy the drums is especially important at this time because the equipment being used to…arrow_forwardMIRR [LO6”] Solo Corp. is evaluating a project with the following cash flows: Year Cash Flow 0 -$47,000 1 $16,900 2 $20,300 3 $25,800 4 $19,600 5 -$9,500 The company uses an interest rate of 10 percent on all of its projects. Calculate the MIRR of the project using all three methods.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT