Reference no: EM132746826

1. Company's value of operations is $2,550 million. $500 000 are invested in government bonds, $656 000 are put in accounts receivables, $879 000 - in inventories. Liabilities include notes payable equal to $498 000, $520 000 of accruals, $960 000 are raised with bonds issues. Company has common stock for $850 000 and $635 000 of retained earnings. What is the value of equity.

2. Is it true? Give an example of opportunity costs. Opportunity costs include those cash flows that occur because of the impact that an investment project has on the existing business.

3. Which of the following statements is CORRECT?

a. The NPV method assumes that cash flows will be reinvested at the required rate of return, while the IRR method assumes reinvestment at the WACC.

b. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

c. The payback period considers all relevant cash flows, including cash flows beyond the payback period.

d. The IRR method assumes that cash flows will be reinvested at the rate equal to IRR.

e. Discounted payback period allows avoiding the liquidity bias of the payback as a method of projects evaluation.

f. None of the above.

4. The cost of equipment, used for the investment project, has been fully depreciated by the end of the project. The firm can sell the used equipment at the final year of the project at the market price. How the cash flow from the equipment sale will be calculated as a part of the project cash flow statement?

5. Garner Co. is considering a new project whose data are shown below. The required equipment has a 4-year life, after which it will be worthless, and it will be completely depreciated by the straight-line method over 4 years. Revenues and other operating costs are expected to increase by the inflation rate 4% starting from the year 2. What is the project's Year 3 cash flow?

Equipment cost (depreciable basis) $812000

Sales revenues, year 1 $496000

Operating costs (excl. deprec.), year 1 $129000

Tax rate 20%

6. Choose the right answer (s): Company's operating assets include:

a. Inventories
b. Investments in other companies
c. Accounts payable
d. Short-term investments
e. Accounts receivable
f. Accruals
g. Cash

7. Nelson Co. is considering a project that has the following cash flow and WACC data.

a. What is the project's NPV and Profitability ratio?

b. What is the project's discounted payback? How do you interpret the result?

WACC 8.00%

Year 0 1 2 3 4

Cash flows $7150 $1435 $2585 $2845 $4770

8. Is it true? Explain. Market-value added concept implies the amount that is added to the company's value by the appreciation of the equity in the stock market.

Please explain your ansers.