following risky scenarios for future cash flows for a firm: Project 1 Probability Cash Flow ($) 2 6 2 4,000 5,000 6,000 Project 2 Probability 14 2 Cash Flow ($) 0 5,000 10,000 Given that the firm has fixed debt payments of $8,000 and limited liability, which scenario will shareholders choose and why? How would your answer change if there were not limited liability?

following risky scenarios for future cash flows for a firm: Project 1 Probability Cash Flow ($) 2 6 2 4,000 5,000 6,000 Project 2 Probability 14 2 Cash Flow ($) 0 5,000 10,000 Given that the firm has fixed debt payments of $8,000 and limited liability, which scenario will shareholders choose and why? How would your answer change if there were not limited liability?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 16SP: Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site....

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A risky $420,000 investment is expected to generate the following cash flows: Year 1 2 3 4$ 102,700 $ 163,030 $ 160,824 $ 135,200 If the firm’s cost of capital is 12 percent, should the investment be made?. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar.NPV: $ Should The investment be made? An alternative use for the $420,000 is a four-year U.S. Treasury bond that pays $25,200 annually and repays the $420,000 at maturity. Management believes that the cash inflows from the risky investment are equivalent to only 70 percent of the certain investment, which pays 6 percent. Should the investment be made? Use Appendix B to answer the question. Do not round other intermediate calculations. NPV: $ Should The investment be made?
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The following table shows the forecast cash flows for two projects: C0C0 C1C1 C2C2 C3C3 C4C4 C5C5 A −$1,100 $30 $30 $30 $30 $1,280 B −1,100 80 80 1,100 Now suppose that the term structure is upward sloping and investors demand a higher return on the more distant flows as in the following table: t 1 2 3 4 5 rtrt 4.0% 4.5% 5.0% 5.5% 6.0% a-1. Calculate the IRR on the two projects. a-2. Calculate the NPV on the two projects. a-3. Do the two measures give the same ranking for the two projects?
A firm is considering two investment projects, Y and Z. These projects are NOT mutually exclusive. Assume the firm is not capital constrained. The initial costs and cashflows for these projects are: 0 1 2 3 Y -40,000 17,000 17,000 15,000 Z -28,000 12,000 12,000 20,000 Using a discount rate of 9% calculate the net present value for each project. What decision would you make based on your calculations? How would your decision change if the discount rate used for calculating the net present value is 15%? Calculate an approximate IRR for each project. Assume the hurdle rate is 9%. What decision would you make based on your calculations? Calculate the payback period for each project. The company looks to select investment projects paying back in 2 years. What decision would you make based on your calculations? Critically discuss Net Present Value (NPV), Internal Rate of Return (IRR) and payback period as criteria for investment appraisal.
cash flows, what is project Beta's NPV? O -$947,867 $1,277,133 A-Z O -$497,867 dofice O -$522,867 Making the accept or reject decision Hungry Whale Electronics's decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it should project Beta. Suppose your boss has asked you to analyze two mutually exclusive projects-project A and project B. Both projects require the same investment amount, and the sum of cash inflows of Project A is larger than the sum of cash inflows of project B. A coworker told you that you don't need to do an NPV analysis of the projects because you already know that project A will have a larger NPV than project B. Do you agree with your coworker's statement? O Yes, project A will always have the largest NPV, because its cash inflows are greater than project B's cash inflows. O No, the NPV calculation is based on percentage returns, so the size of a project's cash flows does not affect a…
1. Elimann Systems is considering a project that has the following cash flow and cost of capital (r) data. What is the project's NPV? Note that if a project's expected NPV is negative, it should be rejected. r= 9.00% Year Cash Flows 1000 1 500 2 500 500 A. 265.65 В. 278.93 С. 307.52 D. 322.90
Alt 3. Both companies are considering an investment in Project One, Project Two, and Project Three. All three projects carry an average amount of risk for each company. Both companies use Payback, NPV and IRR to make investment decisions. The cash flows for both projects are shown below. a. Based on NPV, What projects would Apt be likely to invest in? b. Based on IRR, what projects woutd Heart be tikety to invest in? c. Which project has the fastest payback? Why might that be important to the investment decision? d. If money had no time value, which project would be the best decision? Project One: $10 million initial investment and $2million of free cash flow at the end of each year for 15 years. Project Two: $5 million initial investment. Free cash flows for 5 years : Yr. 1 = $3 million, Yr. 2 = $1.5 million, Yrs. 3-5 = 0.5 million Project Three: Initial investment of $20 million. One Free Cash flow of $40 million in 8 years. No other Free Cash Flows.
3. Robbins Inc. is considering a project that has the following cash flows and cost capital (r) data. What is the project's NPV? Note that if project's expected NPV is negative, it should be rejected. r= 10.25% Year Cash Flows 1000 300 300 300 300 300 A. 111.47 В. 117.33 С. 123.51 D. 130.01 12345
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21. Which of the following is a source of short-term financing? Group of answer choices Issue New Stock Issue Long Term Bonds Factoring Accounts Receivable 22 A qualitative factor (as opposed to a quantitative factor) that managment should consider when evaluating alternative capital investments would be Group of answer choices projected net cash flows The corporate strategy economic returns and IRR estimated costs
Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firm’s optimal capital structure, and what is the weighted average cost of capital at the optimal structure?