Question

How would the value of a firm be affected by the following events? a.The introduction of a new product designed to increase the firm’s cash inflows is delayed by one year. The size of the expected cash flows is not affected.

Answer 1

Available Options Are:

A.The introduction of a new product designed to increase the firm’s cash inflows is delayed by one year. The size of the expected cash flows is not affected.

B. A firm announces to the press that its cash earnings for the coming year will be 10% higher than previously forecast.

C. A utility company acquires a natural gas exploration company. After the acquisition, 50 percent of the new company's assets are from the original utility company and 50 percent from the new exploration company.

Answer with Explanation:

The value of the firm can be calculated as under:

Value of Firm = Present Value of Net Cash Inflows

Option A: If the future net cash inflow is delayed then this means that the future net cash flow will lose money value which means that the present value of the net cash inflows will be reduced and this will reduce the value of the company.

Option B: The cash inflow has increased by 10% which means that the present value of net cash flow would be increased and thus the value of the firm will also increase.

Option C: Now here, if the decision is in the money which means that the decision increased the future cash inflows or created synergy value or in simple words the acquisition has generated additional profits for the company. Then this is the case of increased cash inflow generated which will increase the value of the company. And if the synergy is not created enough to compensate the additional amount paid to acquire the company then this will reduce the value of the firm as it will not generate enough profits as planned by the management.