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- What does it mean when a company’s free cash flow is negative in one or more years? Do negative values of free cash flow in any way alter or invalidate the notion that a company’s fair market value equals the present value of its free cash flows discounted at the company’s weighted-average cost of capital? Suppose a company’s free cash flows were expected to be negative in all future periods. Can you conceive of any reasons for buying the company’s stock?1a. Consider the statement that an asset with higher risk must earn higher risk premium. Is it true or false? Please explain. b) A company with growth opportunities has dividend growth every year. Do you agree or not? Please explain. c) The Trump administration lowered corporate tax rate and this is a monetary policy. Is it true or false? If false, what type of policy is it.Which of the following actions should Paperang Inc. take if it wants to reduce its cash conversion cycle? a. Sell common stock to retire long-term bonds. b. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. c. Take steps to reduce the DSO. d. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. e. Increase average inventory without increasing sales.
- If corporate tax rates decreased, what would most likely happen to depreciation tax shields (DTS), operating free cash flows (FCF) and after-tax salvage values (ATSV)? Assume positive NPV projects and MACRS depreciation. A) DTS would increase, FCF would increase and ATSV would decrease B)DTS would increase, FCF would increase and ATSV would decrease. C) DTS would decrease, FCF would decrease and ATSV would increase. D) DTS would decrease, FCF would increase and ATSV would increase. E) DTS would increase, FCF would increase and ATSV would increase.Which is CORRECT? O Agency costs rise with the increases in the employee ownerships of that fırm O A takeover firm usually offers a higher price than the intrinsic value of the target firm O A higher tax rate increases the cost of corporate borrowing Terminal value is the present value at the terminal year of cash flows beyond the last year of forecastingConsider a company with a Reddington Immune cash flow stream of assets and liabilities. The asset payments all occur before the liability payments. What can you say about the present value of the entire cash flow stream if the interest rate increases from its current rate? Select one: The new present value is negative. b. We cannot say anything about the sign of the new present value. The new present value is zero. d. The new present value is positive. a. C.
- Consider a company with a Reddington Immune cash flow stream of assets and liabilities. The asset payments all occur before the liability payments. What can you say about the present value of the entire cash flow stream if the interest rate increases from its current rate? a. We cannot say anything about the sign of the new present value. b. The new present value is negative. c. The new present value is positive. d. The new present value is zero.You own a company whose profits tax is 20% and fixed assets depreciate over 10 years. Which would be the best change for your company? a) lower tax rate and faster depreciation b) lower tax rate and slower depreciation c) higher tax rate and faster depreciation d) higher tax rate and slower depreciationExecutives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.] without using excel
- Executives at XYZ Corporation realize that they have too much liquid assets. They want to use this cash to buy a company that has decent returns to maximize their asset utilization. They find two companies they can buy, and want to decide if they should acquire company A or Company B. The expected returns from both companies depending on the state of the economy are shown in the table below. Each state of the economy is equally likely to happen. State of the economy Return on company A(%) Return on company B (%) Worse than expected 7.3% -4.7% Expected 11.5% 5.4% Better than expected 16.6% 24.3% Calculate the expected rate of return, and standard deviation of each company. [Note: you are supposed to show every step of your calculation and interpret the result.] Critically evaluate the importance of the standard deviation factor in comparing investments. [Note: remember to use Harvard referencing to reference your sources]D6) Suppose there are perfect capital markets with taxes. Investors expect a company to have $120 earnings before interest and taxes in one year. This company has a 25% tax rate, $100 market value of debt, and 20 shares outstanding. This company’s net working capital, depreciation expense, and capital expenditures are all expected to be zero in perpetuity. Investors expect this company to have the same earnings before interest and taxes, market value of debt, tax rate, and number of shares outstanding in perpetuity. The firm’s unlevered cost of equity is 8% and its cost of debt is 5%. Based on this information, what amount would you expect this company’s share price to be closest to? $5 $20 $40 $80 $100 $200 $400Why is the present value of an amount lesser than its value that is to be received (paid) in the future? a.Deflation causes investors to lose purchasing power when their pesos are invested for greater than one year. b.Investors have the opportunity to earn positive rates of return, so any amount invested today should grow to a larger amount in the future. c.Investments generally are not as good as those who sell them suggest, so investors usually are not willing to pay full face value for such investments, thus the price is discounted. d.Because investors are taxed on the income received from investments they never will buy an investment for the amount expected to be received in the future. e.None of the choices is a correct answer.