Question
In: Finance
If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what...
- If you earn the WACC on a project, (IRR = WACC) or NPV = 0, what have you accomplished for your shareholders?
1A. A semiannual bond pays a 4.5 % coupon for the next 27 years. If investors want a 7.3% return, what are they willing to pay for the bond?
Solutions
Expert Solution
1)
If WACC is earned on the project i.e. IRR=WACC, then the Project was Indifferent. There is No Gain or No Loss by undertaking the Project. Therefore, Nothing is accomplished for shareholders.
1A)
Semi Annual Coupon = Face Value*Coupon Rate/2 = 1000*4.5%/2 = 22.5
Semi Annual Return = 0.073/2 = 0.0365
| Period | Cash Flow | Discounting
Factor [1/(1.0365^year)] |
PV of Cash
Flows (cash flows*discounting factor) |
| 1 | 22.5 | 0.964785335 | 21.70767004 |
| 2 | 22.5 | 0.930810743 | 20.94324172 |
| 3 | 22.5 | 0.898032555 | 20.20573248 |
| 4 | 22.5 | 0.86640864 | 19.49419439 |
| 5 | 22.5 | 0.83589835 | 18.80771287 |
| 6 | 22.5 | 0.80646247 | 18.14540557 |
| 7 | 22.5 | 0.778063164 | 17.50642119 |
| 8 | 22.5 | 0.750663931 | 16.88993844 |
| 9 | 22.5 | 0.724229552 | 16.29516492 |
| 10 | 22.5 | 0.698726051 | 15.72133615 |
| 11 | 22.5 | 0.674120648 | 15.16771457 |
| 12 | 22.5 | 0.650381715 | 14.63358859 |
| 13 | 22.5 | 0.627478741 | 14.11827167 |
| 14 | 22.5 | 0.605382287 | 13.62110147 |
| 15 | 22.5 | 0.584063953 | 13.14143894 |
| 16 | 22.5 | 0.563496337 | 12.67866758 |
| 17 | 22.5 | 0.543653002 | 12.23219255 |
| 18 | 22.5 | 0.524508444 | 11.80143999 |
| 19 | 22.5 | 0.506038055 | 11.38585624 |
| 20 | 22.5 | 0.488218095 | 10.98490713 |
| 21 | 22.5 | 0.471025658 | 10.59807731 |
| 22 | 22.5 | 0.454438647 | 10.22486957 |
| 23 | 22.5 | 0.438435743 | 9.864804213 |
| 24 | 22.5 | 0.422996375 | 9.51741844 |
| 25 | 22.5 | 0.4081007 | 9.18226574 |
| 26 | 22.5 | 0.39372957 | 8.858915331 |
| 27 | 22.5 | 0.379864515 | 8.546951598 |
| 28 | 22.5 | 0.366487714 | 8.245973563 |
| 29 | 22.5 | 0.353581972 | 7.955594368 |
| 30 | 22.5 | 0.341130701 | 7.67544078 |
| 31 | 22.5 | 0.329117898 | 7.405152706 |
| 32 | 22.5 | 0.317528122 | 7.144382736 |
| 33 | 22.5 | 0.306346475 | 6.892795693 |
| 34 | 22.5 | 0.295558587 | 6.650068204 |
| 35 | 22.5 | 0.28515059 | 6.415888282 |
| 36 | 22.5 | 0.275109108 | 6.189954927 |
| 37 | 22.5 | 0.265421233 | 5.971977739 |
| 38 | 22.5 | 0.256074513 | 5.761676545 |
| 39 | 22.5 | 0.247056935 | 5.558781037 |
| 40 | 22.5 | 0.238356908 | 5.363030427 |
| 41 | 22.5 | 0.229963249 | 5.174173108 |
| 42 | 22.5 | 0.221865171 | 4.991966337 |
| 43 | 22.5 | 0.214052263 | 4.816175916 |
| 44 | 22.5 | 0.206514484 | 4.646575896 |
| 45 | 22.5 | 0.199242146 | 4.482948284 |
| 46 | 22.5 | 0.192225901 | 4.325082763 |
| 47 | 22.5 | 0.18545673 | 4.172776423 |
| 48 | 22.5 | 0.178925933 | 4.025833501 |
| 49 | 22.5 | 0.172625117 | 3.884065124 |
| 50 | 22.5 | 0.166546181 | 3.747289072 |
| 51 | 22.5 | 0.160681313 | 3.615329544 |
| 52 | 22.5 | 0.155022974 | 3.488016926 |
| 53 | 22.5 | 0.149563892 | 3.36518758 |
| 54 | 22.5 | 0.14429705 | 3.246683627 |
| 54 | 1000 | 0.14429705 | 144.2970501 |
| Price
of the Bond = Sum of PVs |
671.7851699 |
Therefore, They are willing to pay 671.785/1000 = 67.1785% of Face Value
jeff jeffy answered 2 years agoRelated Solutions
Assume the following CFs, what is the PV, the NPV, and the IRR? Use the WACC...
Assume the following CFs, what is the PV, the NPV, and the IRR?
Use the WACC as your required return. What is the most you should
pay for the set of cash flows and earn your WACC? WACC is 11.55%.
Do not use excel.
Year
0
1
2
3
4
5
6
7
Investment
-200,000
OCF
50,000
60,000
40,000
70,000
15,000
0.00
-10,000
Terminal CF
78,000
(1) In general, if NPV = 0, then what IRR would be equal to? (2) In...
(1) In general, if NPV = 0, then what IRR would be equal
to?
(2) In general, if NPV > 0, then what PI (Profitability
Index) would be equal to?
If the IRR for a project is 20%, then the project's NPV would be:
If the IRR for a project is 20%, then the project's NPV would
be:
14. (Toolkit – Decision Rules – PBAK, IRR, NPV) Calculating NPV & IRR: Your next project...
14. (Toolkit – Decision Rules – PBAK, IRR, NPV) Calculating NPV
& IRR: Your next project provides an annual cash flow of
$15,400 for nine years and costs $67,000 today. Is this a good
project at 8% required return? How about 20%?
Question 14 options:
Yes, Yes
Yes, No
No, Yes
No, No
1(a). When NPV=0, then: Select one: a. IRR less than 0 b. IRR=required return c. IRR...
1(a). When NPV=0, then: Select one:
a. IRR less than 0
b. IRR=required return
c. IRR greater than 0
d. IRR greater than required return
e. IRR=0
1(b). The relationship between NPV of a project and the required
rate of return is: Select one:
a. positive
b. random
c. negative
d. determined by the relationship of NPV to IRR
e. none of the answers is correct
What is NPV, IRR, PI, MIRR of a project with the following cash flows if the...
What is NPV, IRR, PI, MIRR of a project with the following cash
flows if the discount rate is 14 percent?
Year
CF
0
-18,000
1
5000
2
7500
3
8400
4
2100
Also upload your excel files showing your work.
Describe the decision rules for NPV and IRR. How do changes in the WACC affect the...
Describe the decision rules for NPV and IRR. How do changes in
the WACC affect the outcome of these decisions? (There are 4 parts
to this question. 1-2 sentences each) NPV decision rule: Impact of
changes in WACC on NPV rule: IRR decision rule: Impact of changes
in WACC on IRR rule:
(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B....
(NPV,
PI, and IRR
calculations)
You are considering two independent projects, project A and
project B. The initial cash outlay associated with project A is
$50,000
and the initial cash outlay associated with project B is
$70,000
The required rate of return on both projects is
9
percent. The expected annual free cash inflows from each project
are in the popup window:
Calculate the
NPV,
PI,
and IRR for each project and indicate if the project should be
accepted.
...
(NPV, PI, and IRR calculations) You are considering two independent projects, project A and project B....
(NPV,
PI, and IRR
calculations)
You are considering two independent projects, project A and
project B. The initial cash outlay associated with project A is
$50,000
and the initial cash outlay associated with project B is
$70,000
The required rate of return on both projects is
12
percent. The expected annual free cash inflows from each project
are in the popup window:
.Calculate the
NPV,
PI,
and IRR for each project and indicate if the project should be
accepted.
a....
NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of...
NPV, PI, and IRR calculations) You are considering a project
with an initial cash outlay of $70,000 and expected free cash
flows of $28,000 at the end of each year for 6 years. The required
rate of return for this project is 7 percent.
a. What is the project's payback period?
b. What is the project's NPV?
c. What is the project's PI?
d. What is the project's IRR?
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Explain at least three reasons why there are so many divisions / denominations in the Christian...
- COSC 1436 Programming Assignment : Skill Practice Assignment 3 Your skill practice assignment this week will...
- Waste elimination and process improvement can be applied to virtually any process. Identify a process at...
- Do you think the FASB should continue to require the Statement of Cash Flows or are...
- Here is your chance to analyze an actual co-worker conflict situation and make suggestions on how...
- McKinsey Machines Ltd manufactures a single product A. It has two cost centers namely molding department...
- Threads: Assume a multithreaded application using user level threads mapped to a single kernel level thread...
ADVERTISEMENT