Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question Four (20 Marks) Some companies measure performance by requiring both top line growth and bottom line growth (growth in revenue and growth in net

Question Four (20 Marks)

  1. Some companies measure performance by requiring both top line growth and bottom

line growth (growth in revenue and growth in net income). Is this performance measure consistent with shareholders wealth creation? Why or why not? Illustrate your answer with

relevant examples. (10 Marks)

2

  1. Consider ABC Bank as an unlevered firm and firm KCB Bank as a levered firm with target debt-to-equity ratio (B/S) =1. Both firms have exactly the same perpetual net operating income, NOI = 180, before taxes. The before-tax cost of debt, Kb is the same as the risk free rate. The corporate tax rate is 30%. Given the following market parameters:

E (Rm) = 12%, m = 0.0144, Rf = 0.06, B = 1, C = 1.5

a. Find the cost of capital and the value for each firm.( Ignore any effect from personal

income taxes) (5 Marks)

  1. Evaluate the following four projects to determine their acceptance or rejection by ABC Bank and KCB Group. What do the results of this evaluation tell you about leverage in a world with corporate taxes but no personal taxes (Note: rjm is the correlation between the unlevered free cash flows of each project and market)

Project j

Cost j

E(NOIj) After- Tax

j

rjm Correlation of j with

the market

1

100

9

.10

.6

2

120

11

.11

.7

3

80

9

.12

.8

4

150

18

.20

.9

(5 Marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Handbook Of Financing Growth

Authors: Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernandez, John P. Funkhouser, D. L. Williams

2nd Edition

0470390158, 978-0470390153

More Books

Students also viewed these Finance questions

Question

The boxplot is a popular graphical tool to analyze variation.

Answered: 1 week ago

Question

What is meant by planning or define planning?

Answered: 1 week ago

Question

Define span of management or define span of control ?

Answered: 1 week ago

Question

What is meant by formal organisation ?

Answered: 1 week ago

Question

What is meant by staff authority ?

Answered: 1 week ago