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Unformatted text preview: What does this number represent with respect to the firm’s shareholders? 4. Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a 15 percent return on your investment. i 20 marksi Year Cash Flow (A) Cash Flow (B) . $210,000 . $21,000 1 15,000 11,000 2 30,000 9,000 3 30,000 11,000 4 370,000 9,000 a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the discounted payback criterion, which investments will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the profitability index criterion, which investment will you choose? Why? 5. Fama’s Llamas has a weighted average cost of capital of 11.5 percent. The company’s cost of equity is 16 percent and its cost of debt is 8.5 percent. The tax rate is 35 percent. What is Fama’s target debt-equity ratio? i 20 marksi...
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