International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen.
State of the economy
Return on company A(%)
Return on company B (%)
Worse than expected
7.3%
-4.7%
Expected
11.5%
5.4%
Better than expected
16.6%
24.3%
Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.] without using excel
Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen.
State of the economy
Return on company A(%)
Return on company B (%)
Worse than expected
7.3%
-4.7%
Expected
11.5%
5.4%
Better than expected
16.6%
24.3%
Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.]
Critically evaluate the importance of the standard deviation factor in comparing investments. [Note: remember to use Harvard referencing to reference your sources]
The Federal Reserve recently shifted its monetary policy causing Lasik Vision’s WACC to change. Lasik had recently analyzed the project whose cash flow are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC caused forecasted and NVP to change? assume that the Fed action does not affect the cash flows and note that a project’s projected NPV can be negative, in which case it should be rejected. (Hint: you need to find the NPVs under WACC = 7% and 10%).
New WACC=
7%
Old WACC=
10%
Year:
0
1
2
3
Cash flows:
($1,000)
$500
$520
$540
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Unlike other investors, you believe the Fed is going to loosen monetary policy. What would be your recommendations about investments in the following industries?a. Gold miningb. Construction
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Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided toaccept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm'sWACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect theproject's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.Old WACC: 8.00% New WACC: 11.25%Year 0 1 2 3Cash flows −$1,000 $410 $410 $410
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Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.
WACC: 12.75%
0
1
2
3
4
CFs
-$2050
$750
$760
$770
$780
CF L
-$4300
$1500
$1518
$1536
$1554
Options:
$24.80
$30.25
$22.32
$28.52
$22.57
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Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used.
WACC:
9.50%
0
1
2
3
4
CFS
-$2,050
$750
$760
$770
$780
CFL
-$4,300
$1,500
$1,518
$1,536
$1,554
a. $145.46
b. $226.70
c. $228.58
d. $188.91
e. $230.47
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A firm is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO wants to use the IRR criterion, while the CFO favors the NPV method. You were hired to advise the firm on the best procedure. If the wrong decision criterion is used, how much potential value would the firm lose? (compare NPVs for projects)WACC: 6.75%Year 0 1 2 3 4 CFS -$1,025 $380 $380 $380 $380CFL -$2,150 $765 $765 $765 $765
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Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.
WACC:
14.25%
0
1
2
3
4
CFS
-$950
$500
$800
$0
$0
CFL
-$2,100
$400
$800
$800
$1,000
G
$93.62
$95.90
$127.87
$0.00
$116.46
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A US manufacturing firm that produces cars in Mexico to sell in the US and the Eurozone would like to reduce the effect of currency fluctuations on its profits. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.
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Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.
WACC:
10.25%
0
1
2
3
4
CFS
-$800
$650
$350
$0
$0
CFL
-$1,900
$550
$600
$600
$840
Please explain and show calculations.
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Golden Ltd is an exporting company and it will have receivables in Malaysian ringgit in coming years. It expects the Malaysian ringgit to depreciate against the US dollar over time. It wants to get rid of its transaction exposure by denominating the exports in US dollars but that it is still subject to operating exposure. The long-term hedging techniques are constrained and it does not know how much Malaysian ringgit it will receive in the future, so it is difficult even if a long-term hedging method was available. How can Golden Ltd lessen its exposure in the case?
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Why does a company evaluate both the money allocated to a project and the time allocated to the project?
What is the next thing a company needs to do after it establishes investment criteria?
What is the payback method used to determine?
Why do businesses consider the time value of money before making an investment decision?
A fellow student studying Financial Accounting says, “The net present value (NPV) weighs early receipts of cash much more heavily than more distant receipts of cash.” Do you agree or disagree? Why?
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Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.
Old WACC:
8.00%
New WACC:
9.75%
Year
0
1
2
3
Cash flows
-$1,000
$410
$410
$410
Select one:
a.
-$29.25
b.
-$34.12
c.
-$28.60
d.
-$32.50
e.
-$30.55
Clear my choice
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Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Note that a project's projected NPV can be negative, in which case it should be rejected.
Old WACC:
8.00%
New WACC:
9.75%
Year
0
1
2
3
Cash flows
-$1,000
$410
$410
$410
a.
-$32.50
b.
-$30.55
c.
-$29.25
d.
-$34.12
e.
-$28.60
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