Using the Binomial Model, find the values of a firm’s levered equity (EL), and the expected return on the equity, rLE, given the following values: V=100, u=1.3, d=1/u, p=0.7, rf=5%, X=100, and T=3. EL rLE a. 32.34 6.92% b. 32.34 10.74% c. 18.96 6.92% d. 18.96 10.74% FORMULAS: ; EL = ; ; […]
Date: September 19th, 2020
Suppose you have an investment that costs $80,000 at the beginning of the project, and it generates $30,000 a year for four years in positive cash flows. The cost of capital is 12%. The IRR of the project is 18.45% and the NPV is about $11,120. The IRR model assumes that at the end of […]
Date: September 19th, 2020
The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________. A) the future value of the present cash outflows B) the present value of the future benefits or cash inflows C) the present value of the cash outflow D) […]
Date: September 19th, 2020
Until now, Delaware East, Inc has been an all-equity firm; its most recent market equity value was $80 mn., and its cost of equity (and cost of assets) is 15%. Now, the firm decides to increase its leverage by issuing $40 mn. in debt, with the proceeds being used to pay a dividend to shareholders. […]
Date: September 19th, 2020
Due to its secondary position relative to equity, suppliers of debt capital face greater risk and therefore must be compensated with higher expected returns than suppliers of equity capital. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
Rogue River, Inc. is considering a project that has an initial outlay or cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $70,000, and $80,000, respectively. Rogue River uses the internal rate of return method to evaluate projects. Will Rogue River accept the project […]
Date: September 19th, 2020
Simpson, Inc. is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000, and $55,000. Simpson uses the internal rate of return method to evaluate projects. What is the project’s IRR? […]
Date: September 19th, 2020
Meyer, Inc. is considering a very risky five-year project that has an initial outlay or cost of $70,000. The future cash inflows from its project for years 1, 2, 3, 4, and 5 are all the same at $35,000. Meyer uses the internal rate of return method to evaluate projects. Will Meyer accept the project […]
Date: September 19th, 2020
________ involves the sale of accounts receivable. A) Trust receipt loan B) Factoring C) Field warehouse arrangement D) Pledging of accounts receivable ANSWER B
Date: September 19th, 2020
Washington Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Washington expects an additional cash flow of $50,000 in the fifth year. The firm uses the IRR method and […]
Date: September 19th, 2020
