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Elina [12.6K]
4 years ago
15

Careco Company and Audaco Inc are identical in size and capital structure. However, the riskiness of their assets and cash flows

are somewhat different, resulting in Careco having a WACC of 10% and Audaco a WACC of 12%. Careco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Careco project. Audaco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Audaco project. Now assume that the two companies merge and form a new company, Careco/Audaco Inc. Moreover, the new company's market risk is an average of the pre-merger companies' market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is correct?
A) if evaluated using the correct post-merger wacc, project x would have a negative npv.
B) after the merger, careco/audaco would have a corporate wacc of 11%. therefore, it should reject project x but accept project y.
C) careco/audaco's wacc, as a result of the merger, would be 10%.
D) after the merger, careco/audaco should select project y but reject project x. if the firm does this, its corporate wacc will fall to 10.5%.
E) if the firm evaluates these projects and all other projects at the new overall corporate wacc, it will probably become riskier over time.
Business
1 answer:
LenKa [72]4 years ago
5 0

Answer:

E) if the firm evaluates these projects and all other projects at the new overall corporate wacc, it will probably become riskier over time.

Explanation:

Before the merger, Audaco would have rejected any project with an IRR of less than 12% (more risky investments) while Careco only required a 10% IRR (less risky projects). But after the merger the combined WACC will be lower than Audaco's, but higher than Careco's. Therefore, the new merged company will start accepting more risky projects and that tendency will continue over time. Eventually, the company's WACC will have to adjust and increase, and the cycle will continue.

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Answer:

A ). Look at competitors' sales and profitability

Explanation:

A new business is a fresh entrant in the market. It does not have records to use in projecting future sales.  The company will operate in a competitive industry.  To be able to predict its sales, the business will have to rely on data from other firms in the industry.

A study of its competitor's sales and profits will provide the business with a clear picture of what to expect. The new entrant figures should not vary with its competitors with huge differences.

Using guesswork is will probably mislead the directors of the business. Most likely, they will get over-ambitious, which will frustrate them when they begin operations. As they are new, they cannot use the previous year's receipts.

5 0
3 years ago
Internal processes of a company contribute to the company's overall effectiveness. Identifying ways to improve internal processe
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Answer:

Explanation:

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Ways of identifying the root causes might not be possible until basic analysis is carried out or sometimes it might be visible depending on the major problem facing the organization internally.

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6 0
3 years ago
Mention three factors that improve human capital.
7nadin3 [17]
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3 years ago
What determines which price the company should choose for its running shoes?
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3 years ago
What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, an
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Answer:

a. 13.33%

b. 10%

c. 8%

d. 5.71%

Explanation:

The computation of nominal rate of return is given below:-

Rate of return = Dividend ÷ Current market price

For the first case

= $8 ÷ $60  

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= $8 ÷ $80

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For the fourth case

= $8 ÷ $140

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Note :- To get $8 you need to multiply by $100 by the 8%

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3 years ago
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