See attached file.
At the end of 2005, Uma Corporation was considering undertaking a major long-term project in an effort to remain competitive in its industry. The production
and sales departments determined the potential annual cash flow savings that could accrue to he firm if it acts soon. Specifically, they estimate that a mixed stream of future
cash flow savings will occur at the end of the years 2006 through 2011. The years 2012 through 2016 will see consecutive and equal cash flow savings at the end
of each year. The firm estimates that its discount rate over the first 6 years will be 7%. The expected discount rate over the years 2012 through 2016 will be 11%
The project managers will find the project acceptable if it results in present cash flow savings of at least $860,000. The following data is available to assist you:
a) Determine the value - at the beginning of 2006 - of the future cash flow savings expected to be generated by this project.
b) Should the firm undertake this project? Why or why not?
5 points Chapter 4
Present Value of Expected Future Savings
Period: 2006 through 2016
Note: This is a compound TVM problem
Discount rate for years 2006 - 2011 7%
Discount rate for years 2012 - 2016 11%
You are interested in purchasing the common stock of Azure Corporation. The firm recently paid a dividend of $3 per share. It expects its earngins - and hence its dividends - to grow at a rate
of 7% for the foreseeable future. Currently, similar risk stocks have required returns of 10%. (a) Given the data, calculate the present value of this security usign the constant-growth model in Ch. 7
to find the stock value. One year later your broker offers to sell you additional shares of Azure at $73. The most recent dividend paid was $3.21, and the expected growth rate for
earnings remains at 7%. To determine the required rate of return you must use the capital asset pricing model (CAPM). The risk-free rate is currently 5.25%, the market return is 11.55% and the
stock's beta is 1.07. Substittue the appropriate values into the CAPM to determine the firm's current required rate of return. (b) Once this required rate of return is found determine the value
of the stock.
Most Recently Paid Dividend
Growth Rate in Earnings
Required rate of return
Leverage and Capital Structure - chapter 12
Calculation of Share Value
Estimates Associated with
Alternative capital Structures
Capital Structure Expected Estimated
Debt Ratio EPS Required Return
0% $1.75 11.40%
10 1.90 11.80%
20 2.25 12.50%
30 2.55 13.25%
40 3.18 18.00%
50 3.06 19.00%
60 3.10 25.00%
Given the above estimates of EPS and required rates of return based on increasing levels of debt for this organization, calculate the estimated share price value for each level
using a common stock valuation model from chapter 11.
Assuming the organization makes decisions considering how best to maximize shareholder wealth, at what debt ratio will this objective be realized? 5 points
The solution explains three finance questions relating to - project acceptance/share valuation/capital structure