Concept explainers
a.
To calculate: The discount rate of Robinson Corporation.
Introduction:
Discount Rate:
A rate that is used for the calculation of the present value of the cash flows is termed as the discount rate.
a.
Answer to Problem 18P
The discount rate of Robinson Corporation is 7.53% and after rounding off to a whole number, the discount rate is 8%.
Explanation of Solution
Computation of the discount rate:
b.
To calculate: The PV of total outflows of Robinson Corporation.
Introduction:
Present value (PV):
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the
b.
Answer to Problem 18P
The PV of total outflows of Robinson Corporation is $3,171,831.
Explanation of Solution
Computation of PV of total outflows:
Working Notes:
Calculation of net cost of underwriting expense on new issue:
Calculation of after-tax cost:
The calculation of the tax savings per year is as follows:
The calculation of current price of bond, that is, PV of future tax savings is shown below.
The formula used for the calculation of current price of bond, that is, PV of future tax savings is shown below.
c.
To calculate: The PV of total inflows of Robinson Corporation.
Introduction:
Present value:
The current value of an investment or an asset is termed as its present value. It is calculated by discounting the future value of the investment or asset.
c.
Answer to Problem 18P
The present value of total inflow of Robinson Corporation is $2,847,244.
Explanation of Solution
Calculation of the present value of total inflow:
Working Notes:
The calculation of the savings per year is as follows:
The calculation of PV of savings is shown below.
The formula used for the calculation of PV of savings is shown below.
Calculation of underwriting cost write off:
Calculation of PV of deferred future write off:
The calculation of current price of bond is shown below.
The formula used for the calculation of current price of bond is shown below.
d.
To calculate: The NPV of Robinson Corporation.
Introduction:
It is the difference between the PV (present value) of
d.
Answer to Problem 18P
The NPV of Robinson Corporation is ($324,478).
Explanation of Solution
Calculation of NPV:
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Chapter 16 Solutions
FOUNDATIONS OF FIN. MGMT <LL CUSTOM>
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