This topic contains a solution. Click here to go to the answer

Author Question: Which choice has a greater present value if we assume a required rate of return of 10? 1: A lump ... (Read 74 times)

P68T

  • Hero Member
  • *****
  • Posts: 509
Which choice has a greater present value if we assume a required rate of return of 10?
 
  1: A lump sum cash flow today of 248.69, 2: 100 cash flows occurring one, two, and three years from today, or 3: a single cash flow of 331 three years from today.
  A) Choice 1
  B) Choice 2
  C) Choice 3
  D) The choices all have equal present values at a discount rate of 10.

Question 2

Vegan Foods Inc has a current capital structure of 30 debt, 70 equity, and are in a 40 tax bracket. However, after speaking with their investment bankers they have decided to increase their debt to 40 of total capital.
 
  Some of the firm's managers are concerned that there may an increase in risk for stockholders due to the increased financial obligations resulting from the increased debt load. Currently, the levered beta for the firm is 1.20.
 
  Use your knowledge of levered and unlevered betas to estimate the new levered beta for existing shareholders.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

asware1

  • Sr. Member
  • ****
  • Posts: 318
Answer to Question 1

D

Answer to Question 2

To begin we will use the equation U =L/1+(D/E)(1-t) where U =1.20/1+(.30/.70)(1-.40) = 0.9545. The unlevered beta represents the riskiness of the existing assets without regard to how they are financed. With this information we can estimate the value of the levered beta assuming the new capital structure. Here, L =1+ (D/E)(1-t)  U L =1+ (.40/.60)(1-.40) 0.9545 = 1.336.




P68T

  • Member
  • Posts: 509
Reply 2 on: Jul 11, 2018
Gracias!


irishcancer18

  • Member
  • Posts: 310
Reply 3 on: Yesterday
Thanks for the timely response, appreciate it

 

Did you know?

The longest a person has survived after a heart transplant is 24 years.

Did you know?

Most strokes are caused when blood clots move to a blood vessel in the brain and block blood flow to that area. Thrombolytic therapy can be used to dissolve the clot quickly. If given within 3 hours of the first stroke symptoms, this therapy can help limit stroke damage and disability.

Did you know?

Hip fractures are the most serious consequences of osteoporosis. The incidence of hip fractures increases with each decade among patients in their 60s to patients in their 90s for both women and men of all populations. Men and women older than 80 years of age show the highest incidence of hip fractures.

Did you know?

Oxytocin is recommended only for pregnancies that have a medical reason for inducing labor (such as eclampsia) and is not recommended for elective procedures or for making the birthing process more convenient.

Did you know?

Excessive alcohol use costs the country approximately $235 billion every year.

For a complete list of videos, visit our video library