Question
Chapter 10 1. Calgados Ipanema is considering two mutually exclusive expansion plans. Plan A requires $35,000,000 and involves moving to a larger plant, which will
Chapter 10
1. Calgados Ipanema is considering two mutually exclusive expansion plans. Plan A requires $35,000,000 and involves moving to a larger plant, which will provide a cash flow of $10,000,000 per year for twenty years. Plan B calls for $10,000,000 for a more labor-intensive project that has an expected cash flow stream of $3,000,000 per year for 20 years. Calgados Ipanema's required rate of return is 10%.
a) Calculate thevanand theIRRof each project.
b) Plot thevan profilesof plans A and B and approximate the Flsher rate.
c) Provide an explanation based on reinvestment rates and opportunity costs, arguing that thevan method is better than theIRR method when the opportunity cost is 10%.
3. Examine the following cash flows for two Investments:
Year | Investment A ($) | Investment B ($) |
0 | -100 | -100 |
1 | 52 | 41 |
2 | 63 | 55 |
3 | 77 | 110 |
What is the recovery period of the two Investments? IF to accept an Investment a recovery of two years is required, which of these two is acceptable? Is that necessarily the best investment? Explain your answer.
8. Choose one of the following investment alternatives, bearing in mind that there are mutually exclusive projects and that you have $8,000 to investIRR. Use thevancriteria and the Profitability index or benefit/cost ratio. The opportunity cost is 10%.
Period | Alternative A($) | Alternative B($) | Alternative C($) | Alternative D($) |
0 | -8,000 | -8,000 | -4,000 | -4,000 |
1 | 2,000 | 2,000 | 1,500 | 1,500 |
2 | 3,000 | 3,000 | 2,000 | 1,800 |
3 | 3,000 | 6,000 | 2,500 | 2,000 |
4 | 6,000 | 2,500 |
Chapter 12
- The Aceros company has consulted its Investment Bank about the cost of a new bond placement. This was estimated at 10%. IF the marginal rate of Income Tax for Steel is 40%, what is the after-tax cost of debt?
6. Valle del Ro Dulce has established a target capital structure of 45% debt and 55% common stock. Its cost of common stock capital is 18% and its cost of debt is 9%. If the relevant tax rate is 35%, what is theWACC ?
Chapter 13
- IF the company Trenes de la Ciudad has aWACC of 18%, a cost of debt before taxes kd = 10%, where t = 30%, and its ratio D/E = 2, what is ke, the cost of common stock capital?
9. Firm XXX has an operating result of $40 million, has no financial debt, and its cost of capital is 10%. It considers borrowing $300 million to reduce outstanding shares and modify its capital structure. The cost of debt is 8% and the income tax rate is 40%. What would be theWACCand the value of the firm after modifying the capital structure?
Chapter 14
1. You must calculate the value of the company Alpha using the discounted cash flow method. Said company is listed on the Stock Exchange and presents the following information:
. | |
ebit | twenty |
Interests | -5 |
EBT | fifteen |
Taxes (40%) | -6 |
Net profit | 9 |
The firm distributes all profits in the form of dividends and invests all depreciation in fixed assets. You have a debt of $100 at an interest rate kd = 5% (the debt is considered risk-free).Information corresponding to the capital market: e = 1.2 rf=5% rm = 12%You should value the business by the four traditional discounted cash flow methods(ECF,FCF,CCF, andAPV), assuming the MM -with-taxstatements are met .Also perform an equivalence test of the methods.
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