Cost of capital for projects
Harris Inc. is evaluating a project. The project requires $200k in capital expenditures upfront.
The production will continue for two years and the FCFs in years 1 and 2 are $110k and $160k.
The tax rate is 40%.
r 1 r
Growing Perpetuity PV
1 r 1 r
1 r 1 r 2
1 r T r 1 r
C 1 g C1 1 g
C 1 g
C 1 g
1 r T
Acquirer does not need to have cash
Tax advantage (+)
cash: immediate capital gains tax for target shareholders
stock: taxes deferred until received shares are sold
Acquirer can pay less if its stock is overvalued (+)
Facebook - Instag
Mechanics of a Rights Plan Mechanics of a Rights Plan
The The Board declares a dividend of one Right for each share of Board declares a dividend of
one Right for each share of
common stock held.
Each Right represents the right to acquire a fractional sh
1. (20 points)
A and B are two firms in the same industry. The relevant information about them is given below.
Debt Market Capitalization Excess Cash FCF in 2012 Number of shares
A $30 million $40 million $10 million $6 million 5 million
B $10 million - $
Ardent Corporation currently has 20 million shares outstanding with a current price of $45 per
share. Ardent also has debt with a market value of $300 million and an expected return of 6%.
Ardent is expected to have free cash flows of $90 millio
Problem 1 (FCF from the project) - variation of #10 in MFL
ABC Industries is considering replacing one of its existing machines (producing turbo widgets)
with a new, more efficient machine. The existing machine requires $50,000 operating costs per
2Timeline of cash flows
Any financial decision can be represented as a
sequence of cash flows (CFs)
Useful habit: Draw a timeline to visualize the sequence
of cash flows
3Timing of cash flows
Cash flows cannot be directly compared they occur at