Blossom LLC, a leveraged-buyout specialist, recently bought a company and wants to determine the optimal time to sell it. The partner in charge of this investment has estimated the after-tax cash flows from a sale at different times to be as follows: $200,000 if sold one year later; $300,000 if sold two years later; $400,000 if sold three years later; and $500,000 if sold four years later. The opportunity cost of capital is 10.0 percent. Calculate the NPV of each choices. (Do not round factor values. Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: NPV %24 NPV2 %24 NPV3 %24 NPV4 %24 When should Blossom sell the company? Blossom should sell the company in 3 years 2 years 4 years eTextbook and Media 1 year

Blossom LLC, a leveraged-buyout specialist, recently bought a company and wants to determine the optimal time to sell it. The partner in charge of this investment has estimated the after-tax cash flows from a sale at different times to be as follows: $200,000 if sold one year later; $300,000 if sold two years later; $400,000 if sold three years later; and $500,000 if sold four years later. The opportunity cost of capital is 10.0 percent. Calculate the NPV of each choices. (Do not round factor values. Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: NPV %24 NPV2 %24 NPV3 %24 NPV4 %24 When should Blossom sell the company? Blossom should sell the company in 3 years 2 years 4 years eTextbook and Media 1 year

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter14: Valuation: Market-based Approach

Section: Chapter Questions

Problem 18PC

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Question 3Firm A plans to acquire Firm B. The acquisition would result in incremental cash flowsfor Firm A of £10 million in each of the first five years. Firm A expects to divest Firm Bat the end of the fifth year for £100 million. The β for Firm A is 1.1, which is expectedto remain unchanged after the acquisition. The risk-free rate, Rf, is 7 per cent, andthe expected market rate of return, Rm, is 15 per cent. Firm A is financed by 80 percent equity and 20 per cent debt, and this leverage will also remain unchanged afterthe acquisition. Firm A pays interest of 10 per cent on its debt, which will alsoremain unchanged after the acquisition.Required:a) Disregarding taxes, what is the maximum price that Firm A should pay for Firm B?b) Firm A has a share price of £30 per share and 10 million shares outstanding. IfFirm B’s shareholders are to be paid the maximum price determined in part (a) viaa new share issue:i. how many new shares will be issued ii. what will be the post-merger share…
Assignment Four (A)a) You are evaluating the potential purchase of a small business currently generating $42,500of after-tax cash flow. On the basis of a review of similar-risk investment opportunities,you must earn an 18% rate of return on the proposed purchase. Because you are relativelyuncertain about future cash flows, you decide to estimate the firm’s value using severalpossible assumptions about the growth rate of cash flows.(i) What is the firm’s value if cash flows are expected to grow at an annual rate of 0% fromnow to infinity? (ii) What is the firm’s value if cash flows are expected to grow at a constant annual rate of7% from now to infinity? (iii) What is the firm’s value if cash flows are expected to grow at an annual rate of 12%for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
Problem 10.24Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for their production systems,Year System 1 System 20 -$14,800 -$45,662 1 15,037 32,200 2 15,037 32,200 3 15,037 32,200 Compute the IRR for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25.)a). IRR of system 1 is __% and IRR of system 2 is ___% b).Which has the higher IRR, System 1 or System 2? c). Compute the NPV for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25 or 15.25%.)NPV of system 1 is $ ____ and NPV of system 2 is ____d). Which production system has the higher NPV? System 1 or System 2?
QUESTION FIVE Compare and contrast non-discounting methods and discounting methods used in investment appraisals. In the following case, advise whether the project is financially viable using one (01) non-discounting method and three (03) discounting methods of your choice: Bravo Investments Ltd Cost of Capital 10% Initial Cash Outlay K500,000.00 Year Annual Net Cash Flow 1 K100,000.00 2 K165,000.00 3 K180,000.00 4 K100,000.00 5 K170,000.00
Question 6 options: Investigation and a reasonable amount of work had brought the following project to the attention of Arthur Morgan, CEO of Valentine Ventures. The following information is presented to you: CCA rate Building: 4% CCA rate Equipment: 30% Cost of Capital 12% Corporate Tax Rate 40% An immediate cash outlay of $800,000 will be required to purchase vacant land. The vacant land will be required to house the specialized building that will be constructed over the next 2 years. The building will require an immediate down payment of $700,000 now and $1,600,000 upon completion of the building at the end of the second year. New equipment also will be placed in the building at the end of the 2nd year. The equipment will require annual year end purchase payments of $400,000 in year one and two. The equipment…
aj.7 Steve's Stoves Company, which desires a minimum rate of return on its investment projects of 15%, has two proposals under consideration. Their costs and expected cash flows are: A B Initial Investment $96,000 $132,000 Expected after-tax cash flows: Year 1 $40,000 $52,000 Year 2 $32,000 $56,000 Year 3 $48,000 $40,000 Year 4 $24,000 $32,000 In addition, proposal B has an expected cash salvage value at the end of four years of $8,000. The present value of $1 due in 1, 2, 3, and 4 years at 15% is .86957, .75614, .65752, and .57175, respectively.Using the profitability index method, determine which project, if either, should be accepted by the company.
Question 15: • In addition to the $150 million purchase price for Kappa’s equity, $4.5 million will be used to repay Kappa’s existing debt. • With $5 million in transaction fees, the acquisition will require $159.5 million in total funds. • The Blackstone Group’s sources of funds include the new loan of $100 million as well as $ 6.5 million Kappa’s own excess cash (which The Blackstone Group will have access to). • Thus The Blackstone Group’s required equity contribution to the transaction is $53 million. • Exercise 15: how do you get $53 million?
Exercise 10-5A (Algo) Determining net present value LO 10-2 Gibson Company is considering investing in two new vans that are expected to generate combined cash inflows of $29,500 per year. The vans’ combined purchase price is $95,500. The expected life and salvage value of each are six years and $21,200, respectively. Gibson has an average cost of capital of 12 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.) Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted.
HI5002 FINANCE FOR BUSINESS Question 2 You have $50,000 saving and are considering a 30-year investment which is offered in two phases: Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly. Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years. Required: a) Identify which option should you choose in Phase 1 by computing the effective annual interest rate (EAR)? b) Calculate the amount of money you would accumulate in Phase 1 after 20 years if you choose Option A? c) If you would like to have exactly $600,000 after 20 years, how much the…
HI5002 FINANCE FOR BUSINESS Question 2 You have $50,000 saving and are considering a 30-year investment which is offered in two phases: Phase 1: Investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options: Option A pays interest rate of 11.87%, compounding daily. Option B pays interest rate of 12%, compounding quarterly. Phase 2: At the end of 20 years, putting the total amount accumulated in the first phase into another investment, which will pay you an equal income at the end of each year for 10 years. Required: Assume that after 20 years, you put totally $500,000 in the investment in Phase 2, calculate the amount of yearly income would you receive each year for 10 years if the required rate of return is 12.5%, compounding annually? In phase 2, assume the payment of income is changed to 74,000…
Exercise 10-10A (Algo) Using the internal rate of return to compare investment opportunities LO 10-3 Velma and Keota (V&K) is a partnership that owns a small company. It is considering two alternative investment opportunities. The first investment opportunity will have a three-year useful life, will cost $8,922.67, and will generate expected cash inflows of $3,400 per year. The second investment is expected to have a useful life of three years, will cost $7,989.00, and will generate expected cash inflows of $3,100 per year. Assume that V&K has the funds available to accept only one of the opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Calculate the internal rate of return of each investment opportunity. (Do not round intermediate calculations.) Based on the internal rates of return, which opportunity should V&K select?
Question 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (f) Now suppose that of the $200m initial expenditure, $50m was used for the purchase of a machine that has an estimated economic life of four years. The machine will be fully depreciated (i.e., zero book value at the end of the machine’s economic life) on a straight-line basis and expected to have a resale value of $35m at the end of the project. (i) Explain how this will affect the size of the terminal (end-of-project) cash flows. (ii) How will this affect the NPV and the acceptance/rejection of the project (as compared to part (a))? Show your calculations.