Finance:Net present value, IRR and MVA.
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There are 7 questions included in the word file....some data doesn't copy....
1)
A company has capital of $125,000,000. It has an expected ROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%. What is its value of operations? What is its MVA? Hint: Use Equation:
Round your answers to the nearest dollar, if necessary. Enter your answers as a whole numbers. For example, do not enter 1,000,000 as 1 million.
a. V = ____________
b. MVA = ____________
2)
Which one of the following biases best applies to this situation where one associates A with being better than B?
An article just appeared in a respected journal that attributes behavioral biases to mispricing of different classes of common stock. For instance, the authors suggest that if class B shares of common stock have better voting rights than class A shares of common stock then they should be valued a a premium to class A shares of common stocks; however, they oftentimes trade at a discount. This happens because people tend to associate "A" with being better than "B" even though sometimes "B" represents something better than "A."
Thus, if you own a private company and want to cash out by selling most of the ownership in the company to the public but you do not want to lose your ability to control the firm and want a good price for the firm, then what you should do is sell class A non-voting shares and retain class-B voting shares!
This example of systematic mispricing of classes of common stock provides evidence against efficient markets (where prices reflect all information and pricing is not systematically incorrect). The efficient market theory is the basis of many theories in finance.
a) Loss of aversion (prospect theory)
b) Illusion Control
c) Framing
d) Overconfidence
e) Herding
f) Anchoring and Adjustment
g) Regret
h) Representativeness
i)
3)
A project has an initial cost of $39,000, expected net cash inflows of $10,000 per year for 12 years, and a cost of capital of 10 percent. (Hint: Begin by constructing a time line.) What is the project's NPV? Round your answer to two decimal places.
$ __________
4)
A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 8 percent. What is the project's IRR? Round your answer to two decimal places.
5)
A project has an initial cost of $60,425, expected net cash inflows of $11,000 per year for 9 years, and a cost of capital of 11 percent. What is the project's payback period? Round your answer to two decimal places.
6)
A project has an initial cost of $60,000, expected net cash inflows of $14,000 per year for 7 years, and a cost of capital of 13 percent. What is the project's discounted payback period? Round your answer to two decimal places.
7)
Problem 12-9. NPVs and IRRs for Mutually Exclusive Projects
Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12 percent. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Calculate the NPV and IRR for each type of truck, and decide which to recommend.
Calculate the NPV for each type of truck. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, 1000.88 would be entered as 1001.
a. Electric-powered truck
b. Gas-powered truck
Calculate the IRR for each type of truck. Round your answer to two decimal places.
c. Electric-powered truck
d. Gas-powered truck
e. Which type of the truck should the firm purchase?
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Solution Summary
The problems deal with issues in finance: Market value added, Internal rate of return and Net present value.
Education
- B. Sc., University of Nigeria
- M. Sc., London South Bank University
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