The rate used to discount future cash flows to their present values is a key variable of this process. A firm's weighted average cost of capital (after tax) is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt. Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm's investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital. An NPV calculated using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than one calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker[3] for more detailed relationship between the NPV value and the discount rate. For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired...

...6:30 PM IST (UTC +0530).
Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100.
In...

...$42 per share. Assume the expected rate of return
on Federated’s stock is 18 percent.
• Taxes: Federated’s marginal tax rate is Tc = .35
What are the key assumptions underlying your calculation? For what type of project
would Federated’s weighted-average cost of capital be the right discountrate?
2. Suppose Federated Junkyards decides to move to a more conservative debt policy. A
year later its debt ratio is down to 15 percent...

...B. Both cost the amount of $ 60,000. The discountrate is 10%. The cash flows before depreciation and tax are as follows:
Year Proposal A Proposal B
$ $
0 (60,000) (60,000)
1 18,000 19,000
2 15,000 17,000
3 18,000 19,000
4 16,000 14,000
5 19,000 15,000
6 14,000 13,000
Evaluate the above proposals according to:
1. Pay Back Period.
2. Accounting...

...
Raising the Interest Rate
Principles of Finance
Introduction
After years of declining interest rates, we are facing a dilemma; should the Federal government increase rates to contain inflation, or keep rates low to boost the US economy? Increases in consumption of oil, metals, materials, and food, both foreign and domestic, are increasing demand. Prices are rising on a global scale as demand increases. Additionally, the US...

...RISK-ADJUSTED DISCOUNTRATES and LIABILITY BETA
RUSSELL E. BINGHAM T H E H A R T F O R D FINANCIAL SERVICES G R O U P
Table of Contents
Page 2 3 5 7 8 11 12 13 14 14 15 16 17 17
18
Subject Abstract 1. Summary 2. Total Return Model 3. After-Tax Discounting 4. Derivation of Risk-Adjusted DiscountRate and Liability Beta Figure l : Baseline Risk / Return Line vs Leverage 5. Liability Beta Figure 2: Equity vs Liability Beta...

...dealing in catalogue sales Diversification into 3 types of business – Retail, Service and Credit Retail store types – Full line stores, Auto stores, Home and lifestyle stores
Started as a franchisee type variety store Primarily Retail business – Discount stores, Supercenters, Sam’s club warehouses
Focus on price conscious consumers
Comparison of Retail Strategy
Parameters Sears, Roebuck and Co.
Increase of 15% from 3070 in 1995 to 3530 in 1997
Walmart Stores...

...future value of 1,535 invested today for 8 years at 6 percent.
(5 points) $1535 * 1.5938 = $2,446
2. What is the total present value of the following cash stream, discounted at 8 percent? (5 points)
|Year |Amount |Rate |PV |
|1 | $ 400.00 |0.926 | $ 370.40 |
|2 | $ 750.00 |0.857 | $ 642.75 |
|3 | $ 945.00...

...Which one of the following statements is correct concerning annual percentages rates (APRs)?
Answer: The APR is equal to the monthly interest rate multiplied by 12
Give an interest rate of zero percent, the future value of a lump sum invested today will always:
Answer: remain constant
Answer: II and IV
A firm created as a separate and distinct legal entity that may be owned by one or more individuals or entities is called a: corporation...

792 Words |
3 Pages

Share this Document

Let your classmates know about this document and more at StudyMode.com

## Share this Document

Let your classmates know about this document and more at StudyMode.com