QUESTION 1
From societys standpoint, a justifiable reason for a merger would be that it
benefits the economy in a positive way.
Synergistic and tax considerations tend to be rationally acceptable. A synergistic
merger creates great value between the stock
Optimal Operating and Financial Leverage
Case 8
1.)
QBE = F / (P V)
ROI = EBIT / Investment
Plan A
Plan B
7,769,900 = 47,091 units
750 585
17,845,000 = 53,269 units
750 - 415
3,367,600 = 24.05%
14,000,000
4,767,500 = 23.84%
20,000,000
The company should g
12-1 Finding the NPV
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of
11 %. What is the projects NPV? (Hint: Begin by constructing a time line.)
-40,000; 9000 for 7 years; r= 11%
Capital Budgeting- Identify and select the corporate
strategies and individual projects that add value to their
firm.
Capital structuring- Forecast the funding requirements
of their company, and devise strategies for acquiring
those funds.
Types of Busine
V = value of firm
FCF = free cash flow
WACC = weighted average cost of capital
rs and rd are costs of stock and debt
ws and wd are percentages of the firm that are
financed with stock and debt
Operating Breakeven
Q is quantity sold, F is fixed cost, V is
Capital Budgeting- Identify and select the corporate
strategies and individual projects that add value to their
firm.
Capital structuring- Forecast the funding requirements of
their company, and devise strategies for acquiring those
funds.
Types of Busine
Capital Structure Policy
Case 10
4.) c.) The optimal capital structure for Mountain Springs is where the company has 61% debt.
This is where the value of the firm is maximized and the Weighted Average Cost of Capital
(WACC) is minimized.
6.) b.) The EPS i
12% is the rd
WACC on pg 37 equation- short term debt
Question 1- notes payable/market value on balance sheet
Question 10 rc(11%)- answer to question 6, rc(9%) given in question 6, rw(10%) given in
question 9 ; list these three numbers and compare them t
Beta CoeffiGients for Selected Companies
Table 11.8
$QutilW$.t AJr1in~$
Affiarean Eagle Ouffitlers
Boogie
Abercrombie & Fitch
General Electrc
e8ay
Citlgmup
11-29
Example: Work the Web
Many sites provide betas for companies
Yahoo! Finance provides beta,
Unsystematic Risk
= Diversifiable risk
Risk factors that affect a limited number of
assets
Risk that can be eliminated by combining
assets into portfolios
"Unique risk"
"Asset-specific risk"
Examples: labor strikes, part shortages,
etc.
j.
~
Return
'\
Portfolio Risk t>'P
Variance & Standard Deviation
L'CY\,otf
reslJ.i.,.",'
r'\~
Portfolio st~O.D
[email protected]
aweigt1te"a average of the standard
deviation of the component H"IC\)\o,'.!DJ"
securities' risk
* ~-If
it were, there would be no benefit to
!lI!Ilve
v
Variance and Standard Deviation
Variance and standard deviation measure
~hev.9la.!)it~f re~
_
r0Ct\~
r't sIc.,
8)!erage of squared lOo-bV'1
~t:\U'(f1_
2
. (0
\>
d eVla Ions
[:- \)\ i-X: ) ~ P'l
Standard Deviation = Squa~Poot of variance
= Welgm8d
Van
Chapter 05 - Discounted Cash Flow Valuation
45. Here we are given the PYA for an annuity due, number of periods, and the amount of the annuity.
We need to solve for the interest rate. Using the PYA equation:
PYA = [cfw_1- [11 (l + r)]6o1 r](1 + r)
$34,000
Chapter 05 - Discounted Cash Flow Valuation
18. For this problem, we simply need to find the PV of a lump sum using the equation:
PV
= FV I (1 + rY
It is important to note that compounding occurs on a daily basis. To account for this, we will divide
the i
Finance 4260
Case 19B
1) The industry average Debt ratio was 29.4% in 1985 and 38.9% in 1995. DPFs
Debt ratio was 35.3% in 1985 and 50% in 1995, both being higher than the IA.
The IA Current ratio was 2.7x in 1985 and 2.4x in 1995. DPFs Current ratio
decl
Market Equilibrium
In equilibrium, all assets and portfolios
must have the same reward-to-risk ratio
Each ratio must equal the reward-to-risk
ratio for the market
Ecfw_It,_R,
PA
- = E(RM-R,)
PM
1135
Security Market Line
.
The security market line (SML)