917% Suppose the debt ratio (Debt/Total Asset) is 50%, the interest rate on new
ID: 2796779 • Letter: 9
Question
917% Suppose the debt ratio (Debt/Total Asset) is 50%, the interest rate on new debe is ek, to 6. currentcost of equity is 16%, and the tax rate is 40% An increase in the debt ratio to 60% ulha b. False to décrease the weighted average cost of capital (WACO considered that the project being 7. Which of the following statements are CORRECT? Assume has normal cash lows, with one outflow followed by a ses The N mewy merthed ssumes that cash flows will e reinvested at the WACC, while the IRR at the IRR NPV will be. The higher the WACC used to caleulate the NPV, the lower the calculated b. c. If a project's NPV is greater than zero, then its IRR must be less than the WACC d. If a project's NPV is greater than zero, then its IRR must be less than zero. e. Two of the above answers are correct evaluating imutually exclusive investments is that multiple IkRs may exist, and when that appens, we don't know which IRR is relevant. True b. False 9. Projects S and L both have an initial cost of $10,000. Project S's undiscounted net cash flows total S20.000, while L's total undiscounted flows are S30000. At a WACC of 10%, the two projccts have identical NPVs. Which project's NPV is more sensitive to changes in the a. Project S c Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all d. e. costs of capital. Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are horizontal. The solution cannot be determined because the problem gives us no information that can be used to determine the projects' relative IRRs 10. Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows $1,100 $300 5310 5320 $330 $340 a. 2.31 years b. 2.56 years c. 2.85 years d. 3.16 years e. 3.52 years 11. Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working True a. b. False 12. Which of the following statement about cash flow is false? a. If debt is to be used to finance a project, then when cash flows for a project are estimated interest payments should be included in the analysis.Explanation / Answer
Q)6 Debt /Total Assets is 50%Interest rate of new debt is 8%, The current cost of equity is 16% and tax rate is 40%an increase in the debt ration to 60% woud have to decrease the WACC.
Solution-
WACC=
Ineterst(1-Tax) x Weight of debt fund+cost of Equity x Weight of Equity Fund
Now, when debt /total assets = 50%
WACC= 8(1-.0.4)x.0.5 + 16 x 0.5
= 4.8 x 0.5+ 16 x 0.5
= 2.4+ 8=10.4%
when debt /total assets = 60%
WACC= 8(1-.0.4)x.0.6 + 16 x 0.4
= 4.8 x 0.6+ 16 x 0.4
= 2.88+ 6.4=9.28%
Answar is True (WACC would have to decrease from 10.4% to 9.28)
Q7) Which of the following statement is correct.
Correct -a)The NPV method assume that cash flow will reinvested at the WACC ,While IRR Method assume reinvested at IRR.
Correct-b)The higher the WACC used to calculate the NPV, the lower the calculated NPV will be.
Incorrect-c)If a projects NPV is gretter than zero then its IRR must be less than the WACC.
incorrect- d)f a projects NPV is gretter than zero then its IRR must be less than zero.
Incorrect -e)Two of the above answar are correct.
8)False-The primary reason that the NPV methodis conceptually supirior to the IRR mentod for evaluating mutually
exclusive investment is that multiple IRRs may exist, and when that happens, we don't know which IRR is relevant.
10)
Total 3 year 10 months
Year Cash Flow 0 -1100 -1100 Cash Flow Time in Months 1 300 300 330 12 2 310 610 1 0.036363636 3 320 930 270 9.82 4 330 1260 10 Month aprox 5 340 1600 1600 Payback Period is 3 Year+ 930 10 Months 270Related Questions
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