Investment in Assets and required returns
·Cash flow determination
·Non-DCF and DCF techniques
Case: Investment analysis and Lockheed Tri Star
Assignment Questions
1.Compute the payback, net present value (NPV), and internal rate of return (IRR) for this machine. Should Rainbow purchase it? Assume that all cash flows (except the initial purchase) occur at the end of the year, and do not consider taxes. 2.For a $500 per year additional expenditure, Rainbow can get a "Good As New" service contract that essentially keeps the machine in new condition forever. Net of the cost of the service contract, the machine would then produce cash flows of $4,500 per year in perpetuity. Should Rainbow Products purchase the machine with the service contract? 3.Instead of the service contract, Rainbow engineers have devised a different option to preserve and actually enhance the capability of the machine over time. By reinvesting 20% of the annual cost savings back into new machine parts, the engineers can increase the cost savings at a 4% annual rate. For example, at the end of year one, 20% of the $5,000 cost savings ($1,000) is reinvested in the machine; the net cash flow is thus $4,000. Next year, the cash flow from cost savings grows by 4% to $5,200 gross, or $4,160 net, of the 20% reinvestment. As long as the 20% reinvestment continues, the cash flows continue to grow at 4% in perpetuity What should Rainbow Products do? 4.Using the internal rate of return (IRR), which proposal(S) do you recommend? 5.Using the net present value rule (NPV), which proposal(s) do you recommend? 6.How do you explain any difference between the IRR and NPV rankings? Which rule is better? 7.Which of the four subsidy plans would you recommend to the city if the appropriate discount rate is 20%? 8.What is the net Present Value of this project?

9.How many shares of common stock must be issued (at what price) to raise the required capital? 10.What is the effect of this new...

...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...

...Advanced CorporateFinance I SS 2012
Problem Set 1 Valuing Cash Flows
Problem Set 1
Valuing Cash Flows
Exercise 1 (Ex. 11.2 - 11.6 GT): Assume that Marriott’s restaurant division has the following joint distribution with the market return: Market Scenario Bad Good Great .25 .50 .25 Probability Market Return (%) -15 5 25 YR 1. Cash Flow Forecast $40 million $50 million $60 million
Assume also that the CAPM holds. 11.2 Compute the expected year 1...

...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...

...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)...

...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...

...Capital Budgeting Methods for Corporate Project Selection
In a 2001 Graham and Harvey survey of 392 chief financial officers (CFOs) asked “how frequently they used different capital budgeting methods?” Approximately 75% of the CFOs replied that they use net present value (NPV) or Internal Rate of Return (IRR) always or almost always (Smart, Megginson & Gitman, 2004, pg. 251). Projects are viewed as capital investments in the corporate world, and as such,...

...
CORPORATEFINANCE CASE STUDY
SUPERMAR VALUATION
Question 1 - Find SUPERMAR’S current firm and equity values under the following capital structure scenarios:
In order to calculate the cash flows the first step is to calculate the necessary inputs for the WACC. The case indicates that the current capital structure is 14% debt. We have all of the other inputs needed to calculate the cost of equity, cost of debt and WACC. The inputs are the...

...head office operating costs.
(b)
The cost of land and buildings includes £80,000 which has been spent on surveyors fees.
(c)
Avanti plc expects to be able to sell the chain at the end of year 4 for £4,000,000.
Avanti plc is paying corporate tax at 30% and is expected to do so for the foreseeable future. Tax
is paid one year in arrears.
The company will claim capital allowances on fittings and equipment at 25% on a reducing balance
basis. Capital allowances are...