CH05+questions+ - Chapter 5 Corporations issuing equity in...

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Chapter 5 Corporations issuing equity in the share market 1. Explain the concept of capital budgeting. In your answer describe the role taken by a corporation’s board of directors in the investment decision process. 2. Jumbuck Limited is considering the acquisition of a machine to manufacture widgets. The machine will cost $200 000 and will produce a positive cash flow of $60 000 in the first year. The cash flows will increase by 15 per cent each year thereafter for another four years. At that stage the project will cease and the equipment will have no scrap value. The company expects a rate of return of 20 per cent on this type of project. Calculate the NPV and the IRR. Should the company proceed with this investment opportunity? 3. Outback Enterprises Limited has identified that it is exposed to both business risk and financial risk. List some sources of both forms of risk, and explain the relevance of the concept of financial risk to the funding decision of a corporation. 4. ‘The optimal debt-to-equity ratio is the largest ratio that can be serviced by the firm’s expected future income flows.’ Discuss this statement in the context of a firm that operates within a competitive and cyclical business environment. 5. A small company has successfully grown over the years to a point where it is considering becoming a publicly listed corporation. Outline the processes that are involved in the
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This note was uploaded on 03/26/2012 for the course FINS 2624 taught by Professor Hneryyip during the Three '10 term at University of New South Wales.

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CH05+questions+ - Chapter 5 Corporations issuing equity in...

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