a. What is the payback period on each of the following projects? Payback period: A 3 years, B 2 years, C 3years

b. Given that you wish to use the payback rule with a cutoff period of two years, which projects would you accept? “B” Only B meetsthe given cutoff period.
c. If you use a cutoff period of three years, which projects would you accept? “A, B, C” All the projects meet the given cutoff period, thus, every project (A, B, C) is acceptable. (In terms of NPV, since B has the highest NPV, B is the best option.)

d. If the opportunity cost of capital is 10%, which projects have positive NPVs?

“B & C” have the positive NPV at the capital cost of 10%.

e.“If a firm uses a single cutoff period for all projects, it is likely to accept too many short- lived projects.” True or false?

“False” Assuming the definition of “short-lived projects” is “projects with short period of cash flow”, since the concept of payoff period doesn’t consider the cash flow after the payoff, the single cutoff period doesn’t block the long-lived projects (the projects generating long period of cash flow).

#4
You have the chance to participate in a project that produces the following cash flows:The internal rate of return is 13%. If the opportunity cost of capital is 10%, would you accept the offer? Since the internal rate of return is greater than the opportunity cost of capital, there is NO point of accepting this project.

#5
Consider a project with the following cash flows:
a. How many internal rates of return does this project have?

b. Which of the following numbers is the project IRR: (i) -50%; (ii) -12%; (iii) +5%; (iv)+50%? As calculated in problem “a”, the project IRRs are (i) -50% &(iv)+50%. c. The...

...of a new machine to produce this product
d. Salvage value of the new machine at the end of its useful life
e. Increase in net working capital at the beginning of the project’s life
f. Cost to develop a product prototype last year
11.2 A division of Blakewell Manufacturing is considering purchasing an auto insert machine to load computer components on mother boards for $1,500,000. The machine will have annual operating costs of $50,000 and save the company $370,000 in labor costs each year. The machine will have a useful life of 10 years. For tax purposes, straight-line depreciation will be used with an estimated salvage value of $300,000 (which will be the market value at that time). The discount rate is 12% and the corporate tax rate is 32%. What is the NPV of this proposal?
11.3 After examining a potential project’s NPV analysis, the manager advises that the initial fixed capital outlay be increased by $480,000. The initial fixed capital outlay is fully depreciated straight-line over a twelve year life. The tax rate is 35 percent and the required rate of return is 10 percent. No other changes are made to the analysis. What is the effect on the project NPV?
11.4 Central Embroidery needs to purchase a new monogram machine and is considering two options. The first machine costs $100,000 and is expected to last 5 years, and the second machine costs $160,000 and is expected to last 8 years. Assume that the opportunity cost of capital is 8...

...ROLE AND PURPOSE This subject aims to introduce to students a range of basic concepts and ideas in modern finance. After completing this subject, participants should know the principles involved in making investment and financing decisions, understand functions of financial markets and financial managers, and possess basic knowledge of option pricing and financial planning. This foundation course prepares students for more in‐depth studies at a later stage. LEARNING OUTCOMES Upon completion of the subject, students will be able to: a. Understand the role of financial managers and the functions of the financial market; b. Understand the concept of present value and its applications in investment appraisal; c. Understand the risk‐return relation and the determination of cost of capital; d. Possess broad knowledge of financing decision‐making under uncertainty and conditions of market imperfection; e. Apply basic finance theory to solve practical problems. ASSESSMENT METHODS
Specific assessment methods/tasks Continuous Assessment 1. Written Assignment (15%) and Tutorial Participation (5%) 2. Midterm Test Final Examination Total % weighting 50% 20% 30% 50% 100 % √ √ √ √ √ √ √ √ √ √ √ √ √ Intended subject learning outcomes to be assessed a b c d e
Note that under the Double-D policy, students have to obtain at least a “D” in both continuous assessment and final examination in order to pass the course. 1
WRITTEN ASSIGNMENT As required by the...

...The Net Present Value, Mergers and Acquisitions
Michael D. Black
Trident University
Module 5 CASE
Finance 501: Strategic CorporateFinance
Professor: Walter Witham
June 15, 2012
Net Present Value, Mergers and Acquisitions
Abstract
Financial managers must understand the value of dollars invested today in order to make decisions as to what capital ventures are worth pursuing for business growth. The money a business is willing to invest in new equipment or expansion opportunities must provide positive cash flows. This revenue can be earned through operational income growth or cutting costs resulting in savings. One of the purposes of this paper is to explain the concept of Net Present Value to Micron shareholders so they have an understanding whether to vote in favor or against the company taking on a new project costing $3,219,000. The next topic for analysis is whether a merger between Elpida Memory, Micron Technology and Nanya Technology will benefit shareholders for each company. Lastly, I’ll share what learning objectives I have mastered.
Net Present Value, Mergers and Acquisitions
Financial managers must understand the value of a dollar invested today in order to make decisions as to what capital ventures/projects the company should engage in to expand business operations, earn a profit and increase shareholder wealth. The idea that a dollar today is worth more than a...

...Double taxation
The same income getting taxed multiple times.
Maximizing shareholder value
Management principle that implies that the ultimate measure of a company’s success is the extent to which it enriches its shareholders.
Initial Public Offering
Stock Launch – stock in a company is sold to the general public for the first time
Sole Proprietorship, Partnership, Corporation, LLC, Subchapter S Corp (Pros and Cons of each)
Sole Proprietorship
Pros
Simplicity and ease of operation
Cons
Limited Life
Limited Access to Capital
Corporation
Pros
Unlimited Life
Limited Liability
Improved access to capital
Cons
Much less simple to maintain
Higher tax rates
LLC
Pros
Allows for “Special allocation” the disproportionate splitting of member profits and losses
Less Regulation
Cons
Managing members share the bottom line income
Subchapter S
Pros
Can tax the shareholders as partners
Cons
Only 100 shareholders or fewer
Cash Flow (Inflows and Outflows)
Statement of cash flows – shows the changes in balance sheet accounts and income
Retained Earnings
Explains the changes in a company’s retained earnings over time. Breaks down changes in the owners interest in the organization.
The financial ratios that we covered in class (you don’t need to memorize them but know what they mean and measure)
Current Ratio
Measures the firm’s ability to meet its short term obligations
Current Assets/Current Liabilities
Quick Ratio or Acid Test Ratio
Current ratio...

...Finance 09/05/2014
A - Capital budgeting is an analysis of potential additions to fixed assets, it is part of the long term decisions taken by the top management and involve large expenditures. The capital budgeting is very important to firm’s future. The difference between capital budgeting and individual’s investment decisions are in the estimation of cash flows, risk, and determination of the appropriate discount.
B - The difference between interdependent and mutually exclusive projects is that the independent project’s cash flows are not affected by the acceptance of the other, although the mutually exclusive can be adversely impacted by the acceptance of the other. the difference between normal and no normal cash flow stream projects occurs in the signs since for the normal cash flows if the cost ( negative CF) followed by a series of positive cash flows will lead to one change of sign. On the other hand the non-normal project cash flows have two or more changes of sign
C – 1 NPV: is the sum of all cash inflows and outflows of a project
C - 2 - The rationale behind the NPV method is that it is equal to PV of inflows minus the cost which is the net gain in wealth. If the projects are mutually exclusive we will choose the project with the highest NPV and here in our case we will choose project S since it has a...

...would also have to assume that the bond would be held until its maturity date and all scheduled payments related to the bond would be made on time. AirJet could also use this method to estimate future return on a bond.
d. Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts) The coupon rate uses the face value of a bond to compute the bond value. It does not take into consideration the price of the bond at its issue or the redemption value of the bond. As a result, using the coupon rate could cause a large depreciation of funds.
2. Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.
Betas from Raytheon (0.75), Lockheed Martin (0.64), and Boeing (1.11) create an average of 0.8333.
a. What is the cost of common equity? (5 pts) Cost of common equity = Risk free rate + (market risk premium * beta) = 3% + (4% * 0.8333) = .03 + .033332 = .063332 = 6.3332%
b. Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (10 pts)
CAPM Advantages: it is the most relevant way to determine the risk to stockholders, and it takes into account the systematic risk of the stock that is known as the...

...coupon rate could cause a serious depreciation of funds if this method is used
because; the coupon rate uses the face value of the bond, in order to compute the
bond(s) value, and does not take into consideration the price at which the issue of
this bond was or the redemption value of the bond. The Yield to maturity (YTM)
method is better to use because the Yield to maturity (YTM) method incorporates
all fluctuations and the issuing expenses, if any. Thus, the Yield to maturity
(YTM) method is a better method to use, and not the coupon rate as the required
return for debt.
2. Compute the cost of common equity using the CAPM model. For beta, use the average
beta of three selected competitors. You may obtain the betas from Yahoo Finance.
Assume the risk free rate to be 3% and the market risk premium to be 4%.
Risk free Rate 3%
Market risk premium, MRP 4%
Competitors Beta As on October 6, 2010
Dendreon Corp .65 http://finance.yahoo.com/q/ks?s=RTN+Key+Statistics
Douglas Emmet 1.40 http://finance.yahoo.com/q/ks?s=BA+Key+Statistics
Raytheon Company
Common Stock
1.07 http://finance.yahoo.com/q/ks?s=LMT+Key+Statistics
Average Beta 1.04
a. What is the cost of common equity? (5 pts)
The cost of common equity is the annual rate of return that a company, business,
investor, and so on expect to earn when they are investing in shares of a
company.
The cost of common equity is the risk free rate plus (MRP * Beta) = 7.16%
.65 + 1.40 + 1.07= 3.12...

...TOKYO DISNEYLAND AND THE DISNEY SEA PARK: CORPORATE GOVERNANCE AND DIFFERENCES IN THE CAPITAL BUDGETING CONCEPTS AND METHODS BETWEEN AMERICAN AND JAPANESE COMPANIES.
1.What are the industry differences in US Corporate Governance and Japanese Corporate Governance?
JAPANIES CORPORATE GOVERNANCE US CORPORATE GOVERNANCE
Stakeholders of organiztions:
Japanies system believs in the wealth maximization of stake holders, including managers, labour, suppliers, crediters etc American syatem always emphasized on striving for wealth maximization of the share holders and calculated it in terms of CF, capital gains etc
Positive NPV Concept:
Japanies Governance was of the opinion that the motto is not solely wealth maximization of share holder so the capital budgeting criteria was different US governace always check feasibility of the projects in terms of positive NPV
Principle-Agent Relationship
There was no concept of principal agent relationship in Japan, as Japanies believe that even the managers are the principal and can likely to have their own goal setting Unlike Japan, Uscompanies firmly believe in
Principal agent relationship and consider managers to be agents who have to work on the goal setting of share holders
Wealth-Maximization:
Japan believe in long term value maximization US believes in short term value maximization
Status Of Employees:
Empolyees are important stakeholders for Japan The...