A venture capital fund is considering investing in a startup that is seeking toraise $1,500,000 in equity capital. The venture had previously raised$250,000 from angel investors and the founder had invested $50,000 of hersavings in her venture. At the time this investment was under consideration,the company was projecting to be profitable three years from now. Net incomein year three is projected to be $225,000. Because of projected losses in yearone and two, cumulative retained earnings entering year three are projected tobe negative $120,000. The venture capital firm will not invest unless theprojected return on equity in year three is at least 30%If you were employed by the venture capital fund, based on this informationalone, would you recommend that the $1,500,000 investment be made?Yes, the projected return on equity in year three is greater than 30%No, the projected return on equity in year three is less than 30%

In the context of the given question, we can see a venture capital fund is considering investing in…

Answered: A venture capital fund is considering…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter19: Capital Investment

Section: Chapter Questions

Problem 4CE: Manzer Enterprises is considering two independent investments: A new automated materials handling...

See similar textbooks

Similar questions

Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?
Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?
Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.
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
An engineering team for a corporation has decided to move forward with a project that will cost $82 million and now they have to obtain the funding for this. Since they don't have $82 million in retained earnings they need to raise the capital by other means. The finance department for the company has decided the best way to raise funds is a combination of issuing stocks, getting a bank loan, and issuing bonds. They plan to sell $50 million worth of stocks. The stockholders expect a rate of return of 12% The company will get a bank loan at an interest rate of 10% worth $12 million. The company will also sell bonds worth $20 million at a rate of 6% compounded yearly. Determine the before tax cost of capital for the company. Thus, calculate the Weighted Average Cost of Capital or WACC ?
Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $15 million to fund all of its positive-NPV projects, and her job is to determine how to raise the money. Reynolds’s net income is $11 million , and it has paid a $2.00 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. a. Suppose Reynolds follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital budget? b. If Reynolds follows the residual model with all distributions in the form of dividends, what will be its dividend per share and payout ratio for the upcoming year? g. Now consider the case in which Reynolds’s management wants to maintain the $2.00 DPS and its target capital structure…
Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $15 million to fund all of its positive-NPV projects, and her job is to determine how to raise the money. Reynolds’s net income is $11 million , and it has paid a $2.00 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. d. Can Reynolds maintain its current capital structure, maintain its current dividend per share, and maintain a $15 million capital budget without having to raise new common stock? e. Suppose Reynolds’s management is firmly opposed to cutting the dividend; that is, it wishes to maintain the $2.00 dividend for the next year. Suppose also that the company is committed to funding all profitable projects and is willing to issue more debt (along…
Kendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $15 million to fund all of its positive-NPV projects, and her job is to determine how to raise the money. Reynolds’s net income is $11 million , and it has paid a $2.00 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. a. Suppose Reynolds follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital budget? b. If Reynolds follows the residual model with all distributions in the form of dividends, what will be its dividend per share and payout ratio for the upcoming year? c. If Reynolds maintains its current $2.00 DPS for next year, how much retained earnings will be available for the…

Recommended textbooks for you

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Entrepreneurial Finance

Finance

ISBN:

9781337635653

Author:

Leach

Publisher:

Cengage

Cornerstones of Cost Management (Cornerstones Ser…

Accounting

ISBN:

9781305970663

Author:

Don R. Hansen, Maryanne M. Mowen

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Entrepreneurial Finance

Finance

ISBN:

9781337635653

Author:

Leach

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

SEE MORE TEXTBOOKS