Answer:
What does the IRR rule say about whether you should accept this opportunity?
The IRR rule basically states that if the project's internal rate of return (IRR) is higher than the cost of capital (discount rate or WACC), then the project should be accepted. In this case, we are not given the company's WACC or any discount rate we can use, therefore there is nothing to compare the project's IRR against.
Based on prior experience, this project's IRR will not be very high and if we consider the cost of keeping the site clean forever, I really doubt that the project is profitable. If you calculate the project's IRR without including the perpetual cleaning cost, IRR = 11%.
If we assume any of the 3 WACCs I used as an example below, the project's IRR including cleaning costs:
- if WACC = 12%, then IRR = 9.26% REJECTED
- if WACC = 10%, then IRR = 8.98% REJECTED
- if WACC = 9%, then IRR = 8.79% REJECTED
- if WACC = 8%, then IRR = 8.54% ACCEPTED
In order for this project to be profitable, the WACC would need to be very low (around 8% or less).
Explanation:
cost of opening a new mine $120 million
annual cash flow $20 million
expected cleaning costs $2 per year in perpetuity
the cost of keeping the site clean forever = $2 million / discount rate or WACC:
- if WACC = 12%, then perpetual cost = $16.67 million
- if WACC = 10%, then perpetual cost = $20 million
- if WACC = 9%, then perpetual cost = $22.22 million
- if WACC = 8%, then perpetual cost = $25 million
Answer:
A.50%.
Explanation:
The price elasticity of demand formula is:
PED = Change in quantity demanded / change in price
plugging the amounts into the formula we obtain:
2 = X / 25%
Now, simply solve for X:
2 x 25% = X
50% = X
Thus, the total quantity demanded would increase by 50%
Answer: (1) $61,495
(2) $17,200
(3) $5,400
Explanation:
Given that,
sales = $275,000
costs = $188,000
other expenses = $7,900
depreciation expense = $15,200
interest expense = $13,600
taxes = $17,605
dividends = $10,500
new equity issued = $5,100
Net new long-term debt = $3,600
EBIT = sales - depreciation expense - costs - other expenses
= $275,000 - $15,200 - $188,000 - $7,900
= $63,900
EBT = EBIT - Interest
= $63,900 - $13,600
= $50,300
EAT = EBT - Taxes
= $50,300 - $17,605
= $32,695
Retained earnings = EAT - Dividends
= $32,695 - $10,500
= $22,195
(1) operating cash flow = EBIT - Taxes + depreciation expense
= $63,900 - $17,605 + $15,200
= $61,495
(2) cash flow to creditors = Interest - Net new long-term debt
= $13,600 - (-$3,600)
= $17,200
(3) cash flow to stock holders = Dividend - net new equity
= $10,500 - $5,100
= $5,400
Answer:
B;A
Explanation:
You have the following data on three stocks: Stock Standard Deviation Beta A 20% 1.59 B 30% 1.71 C 25% 1.29 If you are a strict risk minimizer, you would choose Stock B if it is to be held in isolation and Stock A if it is to be held as part of a well-diversified portfolio.
