If the IRR is less than the WACC, the project should be rejected, as it impoverishes the firm’s owners. If the IRR equals the WACC, it earns only normal profits (i.e., the owners’ opportunity costs) and accepting it is a matter of indifference. In this care the project’s IRR is 18.031 > 11.88%, therefore the IRR rule tells us the same as the NPV rule: this project will enrich the firm’s owners. We note in passing that in more advanced courses in finance you would learn about projects for which this rule cannot be used. Broadly speaking, they are projects whose cash flows changes sign more than once—e.g., from negative to positive to negative again.
Kant says that people in business should act out of duty alone, not self-interest or desire to earn huge amounts of money. For example motivating bankers through huge bonuses would be wrong. Kant would also apply the categorical imperative, to derive the duty of a businessman. However, whether Kantian ethics is the best approach in comparison to theories such as utilitarianism is debatable. One issue surrounding business is the relationship of the business to the consumers.
What are the key assumptions that especially influence WACC? 5. What are the free cash flows of the packaging machine investment? Should Koh approve the investment? Management Summary Financial Health The financial health or strength of a company is measured by its ability to service its financial obligations senior to the common shareholders.
Metapath´s board believes the company has a great potential as an independent public company, and wonders if a Metapath and CallTech merger makes sense. Case problems and questions: Metapath must analyze how the offer from RSC, with the Participating convertible preferred stock would integrate with the existing preferred stocks already granted to existing shareholders in previous financing rounds. Usually the earlier investors preferred stocks becomes junior to the new VCs preferred, because the new VC won’t take the word of the old VCs that the company is well. The new VC would rather make sure his money is “secured” by having a senior claim through preferred stock. They would need to do a valuation of the participating feature of the Series E preferred stocks in the offer from RSC.
CanGo has very low profitability ratios, low turnover ratios and a high debt equity ratio. All these demonstrates that it’s in Cango’s best interest to take control of their financial performance, and focus on generating cash for the company, make better use of available resources and ensure that they are able to generate profit. The company should not take more debt and need to focus on how to use their existing resources to generate more cash flow to be able to operate and meet their financial obligations. Under the current operating system debt is increasingly being
Current ratios show relative amount of working capital, while quick ratios show the amount of quick assets by current liabilities. “Ratio analysis is an important and powerful technique or method, general, used for financial analysis. The purpose of financial analysis is to diagnose the information content in financial statements so as to judge the profitability, financial soundness of the firm, and chalk out the way to improve existing performance.” (Ramagopal, 2008) Duke Energy’s Current ratio is 3.54; this is calculated by current assets, 2,049 million, divided by current liabilities, 578 million. There is no current problem with the liquidity in this company. The quick ratio is .33 and this is calculated by cash and accounts receivable, 1,501,000+ 1,316,000 divided by current liabilities, 8,644,000.
Is the real estate subsidiary a good idea? If the managers buy more stock, what is the appropriate price? There are two major concerns which are gaining competitive advantage and determining comparable valuations. Brazos should allow the company to sell the managers some stock of the business to benefit the managers. But the amount that a manager can hold stocks should be limited because the ownership would be split in this way as it is not good for Brazos itself to decrease its ownership.
The main focus of the company should be on the incremental cash flow because this holds a marginal benefit from the project. Depreciation is qualified as an expense: therefore, and the larger the depreciation the larger the expense. From the accounting profits point the profit would be much lower than on the free cash flow. 2. What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from accounting profits or earnings?
Question 1 Currently, 9.30% is used as their hurdle rate and satisfied with the intellectual relevance of a hurdle rate as an expression of the opportunity cost of money by the managers. As a result the firm’s share prices are sluggish. Their price-to-earnings ratio is also below investor’s expectation in comparison to the company’s risk. The relationship between risk and return is important to take into consideration. The constant hurdle rate results in a flat line and doesn’t correlate risk with return.
Seagate management have a fiduciary duty to protect the wealth of shareholders and ensure a fair offer tendering hence they have narrowed down to opt for this two-staged LBO transaction. Given that the expected cash flows of Seagate were stable and established, it makes leveraged buyout feasible. The borrower is well credit rated, cash flows are steady and the interest rate offered is financially reasonable hence the leveraged-buyout is suitable for Seagate. There are 3 potential sources of value creation in this transaction: 1. Use of a risk hedging financial contract, the swap 2.