For examples 1 and 2, assume the net cash flow is 2,000,000, the tax rate is 40% and the cost of common equity is 10% which is computed using the CAPM equation. Explain in a few sentences what each example means.
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- A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2 Year 3 A $1,000 1,400 1,800 B $1,700 1,700 1,700 If the firm can earn 6 percent in other investments, what is the present value of investments A and B? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar.PV(Investment A): $ __________PV(Investment B): $ __________ If each investment costs $4,000, is the present value of each investment greater than the cost of the investment? The present value of investment A is __less than___ / __greater than__ the cost. The present value of investment B is __less than___ / __greater than__ cost.A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2 Year 3 A $1,500 1,900 2,200 B $1,400 1,400 1,400 If the firm can earn 6 percent in other investments, what is the present value of investments A and B? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar.PV(Investment A): $ PV(Investment B): $ If each investment costs $4,000, is the present value of each investment greater than the cost of the investment?The present value of investment A is -Select-less than greater than Item 3 the cost.The present value of investment B is -Select-less than greater than Item 4 the cost.A firm has the following investing alternative: Cash Inflows Year A B C 1 $1,100 $3,600 -- 2 1,100 -- -- 3 1,100 -- $4,562 Each investment costs $3,000; investments B and C are mutually exclu- sive, and the firm’s cost of capital is 8 percent. a. What is the net present value of each investment? b. According to the net present values, which investment(s) should the firm make? Why? c. What is the internal rate of return on each investment? d. According to the internal rates of return, which investment(s) should the firm make? Why? e. According to both the net present values and internal rates of return, which…
- You are given the following information for a firm: EBIT x (1-T) this period Depreciation Net Working Capital Increase Asset Beta Capital Expenditures Growth Rate of FCF Risk Free Rate = = $17 million $2.4 million $0 1.1 $3.7 million 9% 3% Market Risk Premium Using the above data, what is the present value of all FCF? Don't forget that in applying the growing perpetuity formula, you have to use not this year's FCF, but next period's FCF (multiply this period's FCF by (1 + growth rate of FCF). 6.3% Your answer should be in $millions. For example, if your answer is $7.34 million, then enter 7.34 in the answer box.Assume a firm has EBAT of $590,000, and no amortization. It is in a 40 percent tax bracket. a. Compute its cash flow. $ 354,000 b. Assume it has $590,000 in amortization. Recompute its cash flow. $ 590,000 c. How large a cash flow benefit did the amortization provide? $T] Cash flow Cash flow Benefit in cash flowSuppose you invested $100 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $3 today and then you sold it for $96 What was your dividend yield and capital gains yield on the investment? OA. 3%, -4% OB. -3%, 4% O C. 4%, 3% OD. 3%, 4% SITE
- CDE Corporation is considering an investment that has the following cash flows: ($1,000,000) 500,000 300,000 Now investment Year 1 cash inflow Year 2 cash inflow Year 3 cash inflow 200,000 200.000 100,000 Year 4 cash inflow Year 5 cash inflow Required a) Calculate the following: The payback period i. The return on the initial investment ii. The present value using an interest rate of 10% (b) Is the investment worthwhile? Why?A firm has the following investment alternatives and has the following cash inflows.Each costs $130,000, investments C and D are mutually exclusive, and the firm’s cost of capital is 9%. Cash Flows Year A B C D 1 $45,000 $43,000 $147,000 - 2 45,000 50,000 - - 3 45,000 60,000 - $176,000 a. What is the net present value of each investment? Which investment(s) should the firm make and why?b. What is the internal rate of return on each investment? Which investment(s) should the firm make and why?c. If the firm could reinvest the $147,000 earned in year 1 from investment C at 12%, would that affect your answers?d. The payback method would select which investment? Why?The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions? Year: 1 2 3 Free cash flow: −$20 $42 $45 $680 $648 $617 $586 $714
- A company is considering an investment where the estimated cash flows are as follows: Year Cash Flow 0 (100000) 1 60000 2 80000 3 40000 4 30000 The company cost of capital is 13%. What is the NPV? 51800 61871 56800 122000 510002. What is the present value of the following cash flow streams at an interest rate of 6.25%? Which cash flow (top or bottom) is better from an investment standpoint? Why? Years: 0 1 CFS: Years: CFS: $0 0 $750 $75 1 $2,450 2 $225 2 $3,175 $0 3 H $4,400 $300Find the present value of the streams of cash flows shown in the following table. Assume that the firm's opportunity cost is 12%. A B C Year Cash Flow Year Cash Flow Year Cash Flow 1 -$2,000 1 $ 10,000 1-5 $ 10,000/yr 2345 5 2 3,000 2-5 5,000/yr 6-10 8,000/yr 4,000 6 7,000 6,000 8,000