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Financial Analysis - Maximize Firm Value

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After taking a closer look at the numbers and doing the financial analysis, you begin to think more strategically, and in a broader context, you anticipate what the CFO would ask or what the head of Strategic Planning might want to know. You think about some of the key issues:

- Does this project maximize firm value?

- What will be the impact to the stock price?

- How does this capital project fit with the strategic direction of the firm?

In light of this, you decide to email the CFO and VP of Strategic Planning in anticipation of their questions.

Explain how capital projects maximize firm value. Explain how major capital projects can impact a firm's stock market valuation and how they should fit with the strategic direction of the organization.

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The response addresses the queries posted in 1072 words with references.

//Capital projects are substantial for the firm as they involve the precious resources of the firm in a large amount and have the potential to affect the firm's profitability. This paper will enclose a brief introduction of capital projects and will also elucidate the nature of capital projects, and their favorability. The below part of the paper will illustrate that how capital projects maximizes firm value.//

Capital Projects Maximize Firm Value

Capital projects are generally long term projects for the construction of a new building, acquisition of land or property or for acquiring equipment. These projects comprise of massive investments and involve a large number of resources of the investors. Hence, capital projects are crucial for the firm. Capital projects maximize a firm's value in several ways. Such projects are valuable for the firm because they increase the value of the firm in terms of its stock market valuation. Capital projects if achieved, their desired results maximize the firm's goodwill in an enormous manner, which in turn maximizes firm's value. Capital projects are also valuable for the firm as they provide a strong platform to firms regarding their future perspectives (Baker & Powell, 2009).

As capital projects increases the goodwill and stock market valuation of the firm, firms can utilize all these to achieve their future objectives and grow successfully. Successful capital projects bring huge profits for the firm, which helps the firm to acquire necessary physical and financial resources. Since, capital projects are so much valuable for the firm and maximizes its value in numerous manner, it s necessary that these projects should be designed and implemented efficiently. Although capital ...

Solution Summary

The response addresses the queries posted in 676 words with references. Capital projects are substantial for the firm as they involve the precious resources of the firm in a large amount and have the potential to affect the firm's profitability. This paper will enclose a brief introduction of capital projects and will also elucidate the nature of capital projects, and their favorability. The below part of the paper will illustrate that how capital projects maximizes firm value.

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Financial Analysis Questions

Practice test questions

1) What are the key advantages common to LLPs and LLC.

2) If a stock is paying $3.0 per year in dividends, and is expected to continue this indefinitely, with a required rate of return of 10% what is the value of the stock?

3)If you want to have $600,000 for retirement in 20 years and have only $100,000 saved today, how much do you need to put away at the end of each year until retirement if your assets can earn 8% per year?

4) The value of an asset depends on returns, timing, and __________(fill in the blank).

5) The optimal cost of capital is where the cost of capital is maximized (true/false). Circle one choice.

6) Scenario analysis focuses on liquidity of the organization (true/false). Circle one.

7) Hedging increases risk (true/false).

8) If you borrow $20,000 at the interest rate of 12%, what are the end-of-year payments if the loan is for five years? If the interest rate is 12.5% would the monthly payment be higher/lower?

9) What is meant by an agency relationship in corporate governance? Develop a specific example to align the parties' interests?

10) Mark each account in the table. The first column is either IS for income statement or BS for balance sheet. In column two label the item as either CA (current assets), CL (current liability), E (expense), FA (fixed assets), LTD (long-term debt), R (revenue), or SE (stockholder's equity).

Item (Account) Column 1 Column 2
Maintenance Truck
Canned Goods @ Grocery
Marketable Stocks Owned by Company
Interest Paid on Loan
Salaries
Bank Interest Received
Factory Building
Cost of Goods Sold
Amortization of Assets
Officer Bonuses

11) Find the future value of an ordinary annuity of $200 each year for 5 years, earning 5%.

12) Starlight, Inc. must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis.
Asset A Asset B
Rate of Return Probability Rate of Return Probability
8% 30% 7% 30%
13% 60% 17% 50%
18% 10% 27% 20%

For each project compute: The expected rate of return.

13) The Happy Puppy Company has compiled the following data for adding a new line of pets to their stores. What NPV is calculated using this method? The initial investment in the project is $45,000. The firm's cost of capital is 12%, however projects in this risk class have a 14% required rate of return. The risk-free rate is 8%.
Year Cash Inflow
1 $23,000
2 19,000
3 15,000
4 13,000
5 $10,000

14) What three functions do investment bankers have?

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