With annual earnings of $32.5 million every year, Durango Data wasconfident that this amount of profit could be sustained indefinitely if itsimply maintained its current portfolio of assets and avoided any newprojects. But Durango is approached by a data warehouse technologycompany with an opportunity for Durango to invest $29 million today;and $45 million one year from now in a new product that requirestechnical development and regulatory approval. The new investment willgenerate annual after-tax cash flow of $17 million in perpetuity startingthree years from today. Durango has 14.0 million shares outstanding andthe required rate of return on the stock is 11%.What is the price of one Durango share (the share price stated as $ per share)if it continues "business as usual" and turns down the investment opportunity?$17.01$15.44$25.93$18.03$21.10

In order to determine the Earning per share, the total earning available to equity shareholders are…

Answered: With annual earnings of $32.5 million…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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With annual earnings of $32.5 million every year, Durango Data was confident that this amount of profit could be sustained indefinitely if it simply maintained its current portfolio of assets and avoided any new projects. But Durango is approached by a data warehouse technology company with an opportunity for Durango to invest $29 million today; and $45 million one year from now in a new product that requires technical development and regulatory approval. The new investment will generate annual after-tax cash flow of $17 million in perpetuity starting three years from today. Durango has 14.0 million shares outstanding and the required rate of return on the stock is 11%. What would Durango's new stock price ($ per share) be if the Board approves the investment? $21.93 $24.98 $20.26 $25.10 $21.53
Nakamichi Bancorp has made an investment in banking software at a cost of $1,430,438. Management expects productivity gains and cost savings over the next several years. If, as a result of this investment, the firm is expected to generate additional cash flows of $667,344, $725,331, $475,138, and $343,237 over the next four years, what is the investment’s payback period? (Round answer to 2 decimal places, e.g. 15.25.) Payback period is years
You are the owner of a large data-services firm and are deciding on the purchase of a new hardwarecooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. Theinstallation of this cooling system will cost $3,000,000. Additionally, O&M expenditures for the collingsystem are expected to be $2,120 per year.1. At face value, does this system seem profitable? By how much?2. Assume that your company uses a discount rate of 6%.a. What is the Net Present Value (NPV) of this project?b. How does the NPV of this project change as you assume a higher or lower discountrate? Why?c. What is the IRR/ROI of this project?d. How much should the yearly cost-savings be in order to break even?i. (hint) use goal-seek/what-if analysis3. Suppose that you decide to finance the purchase of this system through a loan from the bank.The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.a. Using a 70/30 debt-to-equity ratio, what is…
An oil and gas company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 Billion dollars, and the company expects to earn $500 Millions in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100 Millions per year. The company requires a 17% return on its investments. Should it undertake the project? If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500 Millions in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.
Your firm has the opportunity to repurpose one of its facilities and use it to invest in a new product that would change the profits of your firm for the next four years as follows: Year Before After 9.5 11 3 12.5 4 The facility is currently being used to produce another product, which is scheduled to be decommissioned in 5 years. That product is expected to generate 0.5 in annual cash flows for the remainder of its life. Assuming that opportunities with similar risk earn 10% return annually, what is the contribution of the project to the value of your firm? 2.699 0.614 0.558 -0.278
Cisco, Inc., has a proposal from the Engineering Planning Division to invest Cisco retained earnings in the design, testing, and development of the next generation of smart grids useful in the Internet of Things (IoT) environment. The initial investment projection is $5,600,000 in year 0, $2,600,000 in year 5, and $96,474 in years 11 and beyond. At i = 9% per year, calculate the infinite-life equivalent annual cost in years 0 through infinity of the proposal. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
A start-up company Amazonian.com is considering expanding into new product markets. The expansion will require an initial investment of $160 million and is expected to generate perpetual EBIT of $40 million per year. After the initial investment, future capital expenditures are expected to equal depreciation, and no further additions to net working capital is anticipated. Amazonian.com’s existing capital structure is composed of equity with a market value of $500 million and debt with a market value of $300 million, and has 10 million shares outstanding. The unlevered cost of capital for Amazonian.com is 10%, and Amazonian.com’s debt is risk free with an interest of 4%. The expansion into the new product market will have the same business risk as Amazonian.com’s existing assets. The corporate tax rate is 35%, there are no personal taxes or costs of financial distress. a) Amazonian.com initially proposes to fund the expansion by issuing equity. If investors were not expecting this…
A corporation is trying to decide whether to buy the patent for a productdesigned by another company. The decision to buy will require an investment of $8 million, and the demand for the product is not known. If demand is light, the company expects a return of $1.3 million each year for three years. If the demand is moderate, the return will be $2.5 million each year for four years, and high demand will mean a return of $4 million each year for four years. It is estimated that the probability of high demand is 0.4 and the probability of a light demand is 0.2. The firm's interest rate (risk-free) is 12%. Calculate the expected present worth of the investment. On this basis, should the company make the investment? (All figures represent after-tax values.)
A financial services company is considering a new investment in a new technology platform for investment management. The company has identified a fintech startup that is seeking funding at a valuation of $5 million. The company expects to receive a dividend of $200,000 per year over a five year term and sells it equity stake at a valuation of $10 million. What is the expected return on investment if the financial services company invests $2 million in the fintech startup
Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm’s only activity and that the firm will close one year from today. The firm is obligated to make a $5,400 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following information pertaining to the two projects:   Economy Probability Low-VolatilityProject Payoff High-VolatilityProject Payoff   Bad .50 $5,400       $4,800           Good .50 6,550         7,150         a. What is the expected value of the firm if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations and round your answers to the nearest whole dollar, e.g., 32.) b. What is the…
Limited Corporation is looking to replace a machine that is expected to increase productivity and, thereby, revenue. The cost of the machine is $100,000. Revenue is expected to increase by $20,000 in the first year, $50,000 in the second year, and $80,000 in the third year. After the third year, the company plans substitute the machine with a higher performance one. The alternative to this investment is to buy $100,000 in risky corporate bonds that currently yield 10% annually.   Explain the feasibility of this project by computing the NPV.
Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm’s only activity and that the firm will close one year from today. The firm is obligated to make a $4,400 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following information pertaining to the two projects:   Economy Probability Low-VolatilityProject Payoff High-VolatilityProject Payoff   Bad .50 $4,400       $3,800           Good .50 5,050         5,650         a. What is the expected value of the firm if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations and round your answers to the nearest whole dollar, e.g., 32.) b. What is the…

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