Continuing with the numbers from the previous question, compute new value of the firm’s levered equity, , after the following actions by the firm’s management: Management issues additional pure-discount debt which has a promised payment of X’=621 at T=3 and has the same priority as the firm’s original debt. The firm receives total proceeds of […]
Name and describe three issues that can affect the incremental cash flow of a new project. What will be an ideal response? ANSWER Answer: Examples of issues that can affect the incremental cash flow of a new project are: Sunk Costs, Opportunity Costs, Erosion Costs, Synergy Gains, Working Capital, Capital Expenditures, and Depreciation […]
A shift toward more fixed costs increases business risk, which in turn causes earnings before interest and taxes to increase by less for a given increase in sales. Indicate whether the statement is true or false ANSWER FALSE
Explain why one must be careful when accounting for erosion costs. What will be an ideal response? ANSWER Answer: Erosion costs occur whenever a company’s new product competes against its existing products, thereby reducing the sales of these existing products. One must be careful in including the reduced sales. This is because the […]
The current value of levered firm ABC, Inc is $100 million. Its capital structure consists of equity and pure discount debt on which a payment of $80 mn. is due in 5 years. The risk-free rate is 5%. Using the Black-Scholes Option Pricing Model, the value of the firm’s equity is (i) if =20%, and […]
There are two main reasons why we need to deal with depreciation. Which of the below is one of these reasons? A) The gain but not the loss when a capital asset is disposed B) The loss but not the gain when a capital asset is disposed C) The tax flow implications from the OCF […]
________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project. A) Future B) Current C) Discounted D) Incremental ANSWER Answer: D
________ of a project are those that have already been incurred and cannot be reversed. A) Erosion costs B) Opportunity costs C) Sunk costs D) Working capital costs ANSWER Answer: C
Which of the below statements is FALSE? A) Whenever a new product competes against a company’s already existing products and reduces the sales of other products, opportunity costs occur. B) Erosion can provide cost savings. C) A synergy gain occurs when a new product can be introduced that complements another current product so that sales […]
Whenever a new product competes against a company’s already existing products and reduces the sales of the other products, net working capital increases occur. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: Whenever a new product competes against a company’s already existing products and reduces the sales of these […]
