# Corporate Finance Case Study

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Solutions Manual

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:
IRRNX-20 = 20.34%
The IRR criteria implies accepting the NX-20.
c.

The profitability index is the present value of all subsequent cash flows, divided by the initial investment, so the profitability index of each project is:
PINP-30 = (\$185,000{[1 – (1/1.15)5 ] / .15 }) / \$550,000
PINP-30 = 1.128
PINX-20 = [\$100,000 / 1.15 + \$110,000 / 1.152 + \$121,000 / 1.153 + \$133,100 / 1.154
+ \$146,410 / 1.155] / \$350,000
PINX-20 = 1.139
The PI criteria implies accepting the
The NPV is:
NPV = –\$53,386,912 + (\$6,700,000/.1123)
NPV = \$6,251,949

23. We can use the debt-equity ratio to calculate the weights of equity and debt. The weight of debt in the capital structure is:
XB = .85 / 1.85 = .4595, or 45.95%
And the weight of equity is:

XS = 1 – .4595 = .5405, or 54.05%
Now we can calculate the weighted average flotation costs for the various percentages of internally raised equity. To find the portion of equity flotation costs, we can multiply the equity costs by the percentage of equity raised externally, which is one minus the percentage raised internally. So, if the company raises all equity externally, the flotation costs are:

fT = (0.5405)(.08)(1 – 0) + (0.4595)(.035) fT = .0593, or 5.93%
The initial cash outflow for the project needs to be adjusted for the flotation costs. To account for the flotation costs:
Amount raised(1 – .0593) = \$145,000,000
Amount raised = \$145,000,000/(1 – .0593)
Amount raised = \$154,144,519
If the company uses 60 percent internally generated equity, the flotation cost is:

fT = (0.5405)(.08)(1 – 0.60) +

• ## The Cost Of Debt Investments In Common Stock

In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest. 8. In accounting for stock investments of less than 20%, the equity method is used. 9. Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.…

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• ## Questions And Answers On Buying And Finance: Questions On Finance

the Federal Reserve We compute the profitability index of a capital-budgeting proposal by Initial outlay = \$1,748.80 dividing the present value of the annual after-tax cash flows by the cost of the project. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of \$10,000 in August, \$20,000 in September, \$30,000 in October, and \$40,000 in November. How much money is expected to be collected in October? \$25,000 If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should: increase the market value of the firm's common stock.…

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• ## Hedging Case Study

(4 MARKS) The net present value of these cash flows, discounted at a 15.67% required return, is -150 + 30/1.1567 + 30/(1.1567)2 + 30/(1.1567)3 + 30(1 - p)/(1.1567)4 + ... + 30(1 - p)/(1.1567)t = -150 + 30/0.1567 - (30p/0.1567)/(1.1567)3 = -150 + 191.45 – 123.71p Setting this quantity equal to 0 yields a solution of p = 33.5%. This means that the probability of expropriation has to be 33.5% before the investment no longer has a positive NPV. (c) Describe three ways the company could reduce the project’s political…

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• ## Chixchops Case Study

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• ## Characteristics Of Fungible Treasury Bills (T-Bills)

• The remuneration is known and paid in advance to the investor on the acquisition of securities (securities interest). • Investment on Fungible Treasury Bills helps to contribute to the cash resources of the State. Liquidity: • Treasury bills are traded over-the-counter on the secondary market and are eligible (for those who are eligible) as collateral to access Central Bank refinancing. Illustration: Let’s take as example, a 364 day T-Bill. The first issue concerns the award of the first tranche of a nominal amount of 20 000 million CFA.…

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• ## Acid Test Ratio Analysis

The Debt Ratio formula is: Debt Ratio equals Total Debt divided by Total Assets. Company G’s Debt Ratio percentage had increased slightly from 28.34% in YR11 to 29.76% in YR12. Comparing YR12’s 29.76% is above the 75th quartile of 30.0% for the industry. This is a strength for Company G. TIMES-INTEREST EARNED The Times-Interest Earned ratio is used to determine a company’s ability to stay on top of debt payments and shows how many times an organization can pay its interest payments. A reasonably high ratio in this area would be desirable, however, too high a ratio can be considered undesirable and may mean the company has a lack of debt.…

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• ## Buy And Hold Strategy: Case Analysis Of A Capital Market Line

Figure 1 shows a Capital Market Line (CML), this line represents the relationship between risk and expected return of efficient portfolio that contains both risky and risk free assets. . The starting point of the CML shows the risk free return where the target return is 0.0036 with a standard deviation of 0.00018 (zero). The optimal market portfolio is where the target return is 0.0208 and the standard deviation is 0.03578. at this tangent point, the best portfolio for investors is generated. 2.5 Buy and Hold Strategy We as the fund managers will use the strategy of buying and holding stocks for a longer period of time, that is until maturity.…

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• ## Pepsi Case Study

See Note 15. (d) In 2010, we recorded \$398 million (\$333 million after-tax or \$0.21 per share) of incremental costs related to fair value adjustments to the acquired inventory and other related hedging contracts included in PBG’s and PAS’s balance sheets at the acquisition date. (e) In 2010, we recorded a one-time \$120 million net charge (\$120 million after-tax or \$0.07 per share) related to our change to hyperinflationary accounting for our Venezuelan businesses and the related devaluation of the bolivar. ( f ) In 2010, we recorded a \$145 million charge (\$92 million after-tax or \$0.06 per share)…

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• ## Compare And Contrast Red Soda And Blue Soda

Solvency ratios is used to measure the ability of a company to meet its long-term debts. More importantly it is used to determine whether a company’s cash flow is sufficient to meet short and long-term liabilities. The financial ratios that we used for Red soda vs Blue soda was debt to asset ratio, times interest earned, cash debt coverage and free cash flow. First, debt to asset ratio is an indicator of financial leverage. The ratio is calculated by dividing total liabilities by its total assets.…

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• ## Function Of Managerial Finance And Ratio Analysis (IFFCO)

This ratio is also known as as stock turnover ratio or inventory velocity. This ratio is calculated to don 't forget the adequacy of the quantum of capital and its justification for making an investment in stock or stock. stock turnover is used to degree the efficiency of sales. Inventory turnover is the wide variety of times received through dividing fee of sales with the aid of stock. (Average Inventory/Sales) x 365 for days (Average Inventory/Sales) x 52 for weeks (Average Inventory/Sales) x 12 for months Average Inventory or Stocks = (Opening Stock + Closing Stock) 2 Inventory Turnover ratio- sales Inventory ( in crore ) Particular 2007-08 2006-07 Sales 5968.47 5554.53 Inventory 1577.10 2283.94 Inventory Turn.…

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