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Unformatted text preview: present value basis. This $18.79 excess PV belongs to the shareholders--the debtholders' claims are fixed, so the shareholders' wealth will be increased by $18.79 if franchise L is accepted. Similarly, Axis's shareholders gain $19.98 in value if franchise S is accepted. If franchises L and S are independent , then both should be accepted, because they both add to shareholders' wealth, hence to the stock price. If the franchises are mutually exclusive , then franchise S should be chosen over L, because s adds more to the value of the firm. c. 3. Would the NPVs change if the cost of capital changed? Answer: The NPV of a project is dependent on the cost of capital used. Thus, if the cost of capital changed, the NPV of each project would change. NPV declines as r increases, and NPV rises as r falls....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.
- Spring '08