Solve the following managerial finance questions below: questions and the requirements below them: Q1: Cost of capital
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Solve the following managerial finance questions below: questions and the requirements below them:
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Q1: Cost of capital and capital budgeting decision VL Co., is one of the world's leading diversified natural resources companies and it involved in the exploration of various natural resources such as iron ore, copper, and gold. VL is evaluating a new gold mine in the same region. The company's geologist has just finished his analysis of the mine site. He has estimated that the mine will be productive for eight years, after which the gold would be completely mined. The CFO has been asked by the CEO to perform an analysis of the new mine and present his/her recommendation on whether the company should open the new mine. The CFO projected that if the VL undertake the mine, it will cost $900 million today, and it will have a cash outflow of $180 million nine years from now in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table below. Year Cash flows in million 1 126 2 3 4 5 170 240 290 350 Corporation tax rate is 21% The VL has outstanding bonds that are publicly traded. Yield to maturity is 6% 6 240 To evaluate the mine using NPV, the CFO of VL believe that the project's risk is similar to the risk of the firm and hence the project's WACC is simply the firm's WACC. The information related the estimation of a firm's WACC are shown below. The debt ratio is 25% when measured at market value and 32% when measured at book value. VL's debt is 110 million measured at market value and 100 million when measured at book value. VL's equity is 330 million measured at market value and 200 million when measured at book value. The risk-free rate is the prevailing rate on 10-year government bond rate is 1.48 % and market risk premium is 5.7%. VL's beta is 1.41 7 190 8 150 Q1: Cost of capital and capital budgeting decision VL Co., is one of the world's leading diversified natural resources companies and it involved in the exploration of various natural resources such as iron ore, copper, and gold. VL is evaluating a new gold mine in the same region. The company's geologist has just finished his analysis of the mine site. He has estimated that the mine will be productive for eight years, after which the gold would be completely mined. The CFO has been asked by the CEO to perform an analysis of the new mine and present his/her recommendation on whether the company should open the new mine. The CFO projected that if the VL undertake the mine, it will cost $900 million today, and it will have a cash outflow of $180 million nine years from now in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table below. Year Cash flows in million 1 126 2 3 4 5 170 240 290 350 Corporation tax rate is 21% The VL has outstanding bonds that are publicly traded. Yield to maturity is 6% 6 240 To evaluate the mine using NPV, the CFO of VL believe that the project's risk is similar to the risk of the firm and hence the project's WACC is simply the firm's WACC. The information related the estimation of a firm's WACC are shown below. The debt ratio is 25% when measured at market value and 32% when measured at book value. VL's debt is 110 million measured at market value and 100 million when measured at book value. VL's equity is 330 million measured at market value and 200 million when measured at book value. The risk-free rate is the prevailing rate on 10-year government bond rate is 1.48 % and market risk premium is 5.7%. VL's beta is 1.41 7 190 8 150
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Answer rating: 100% (QA)
SOLUTION Q1 a To evaluate the mine using NPV the CFO of VL should discount the expected cash flows using the firms WACC The WACC is calculated using t... View the full answer
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
Posted Date:
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