Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 19, Problem 5MC
Now assume that the equipment’s residual value could be as low as $0 or as high as $400,000, but $200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual value’s increased uncertainty have on Lewis’ lease-versus-purchase decision?
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In a few sentences, answer the following question as completely as you can.
According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain the role of each one in determining expected return.
Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.
O If a project's IRR is equal to its WACC, then under all reasonable conditions, the project's IRR must be negative.
O If a project's IRR is equal to its WACC, then under all reasonable conditions the project's NPV must be zero.
O There is no necessary relationship between a project's IRR, its WACC, and its NPV.
O When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVS when the cost of capital is relatively high.
O If a project's IRR is equal to its WACC, then, under all reasonable conditions, the project's NPV must be negative.
Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
Select one:
a.
The lower the WACC used to calculate it, the lower the calculated NPV will be.
b.
If a project's NPV is greater than zero, then its IRR must be less than zero.
c.
The NPV of a relatively low-risk project should be found using a relatively high WACC.
d.
A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.
e.
If a project's NPV is less than zero, then its IRR must be less than the WACC.
Chapter 19 Solutions
Financial Management: Theory & Practice
Ch. 19 - Define each of the following terms: a. Lessee;...Ch. 19 - Distinguish between operating leases and financial...Ch. 19 - Prob. 3QCh. 19 - Prob. 4QCh. 19 -
Ch. 19 -
Ch. 19 -
Ch. 19 - Harmeling Paint Ball (HPB) Corporation needs a new...Ch. 19 - Reynolds Construction (RC) needs a piece of...Ch. 19 - Big Sky Mining Company must install 1.5 million of...
Ch. 19 - Prob. 7PCh. 19 -
Start with the partial model in the file Ch19 P08...Ch. 19 - Prob. 1MCCh. 19 - Prob. 2MCCh. 19 - Prob. 3MCCh. 19 - Lewis Securities Inc. has decided to acquire a new...Ch. 19 - Now assume that the equipments residual value...Ch. 19 - The lessee compares the present value of owning...Ch. 19 - (1) Assume that the lease payments were actually...Ch. 19 - Lewis’s management has been considering moving to...Ch. 19 - Prob. 9MC
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- d. Consider the following statement "If an analyst decides to use real options methodology to value a project, estimating a standard Discounted Cash Flow model is useless". Do you agree with this statement? Explain your answer.arrow_forward3. In a comparison of the NPV and IRR techniques, which of the following is true? statements A. Both methods give the same accept or reject decision, regardless of the pattern of the cash flows. B. IRR is technically superior to NPV and easier to calculate. C. The NPV approach is superior if discount rates are expected to vary over the life of the project. D. NPV and accounting ROCE can be confused.arrow_forwardAn analysis of a proposal by the net present value method indicated that the present value of future cash inflows exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? A)The proposal is undesirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis. B)The proposal is desirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. C)The proposal is undesirable, and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. D)The proposal is desirable, and the rate of return expected from the proposal is less than the minimum rate used for the analysis.arrow_forward
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