Question

1. Logitech Company had a current share price of $42.70, and the firm had 700,000 shares of stock outstanding. The CEO of the company is considering an investment project that he is confident will result in an NPV of $300,000. However, investors are pessimistic about the project's prospect and believe that the project would results in an NPV of -$140,000 instead. If the CEO decides to go ahead with the project and the negative NPV as expected by investors is realized, what would the new stock price be?

   A.		$42.30
   B.		$43.50
   C.		$43.20
   D.		$42.50
   E.		$42.90

2. Husqvana Corporation is considering an investment project that generates a cash flow of $640,000 next year if the economy is favorable but generates only $260,000 if the economy is unfavorable. The probability of favorable economy is 60% and of unfavorable economy is 40%. The project will last only one year and be closed after that. The cost of investment is $420,000 and Husqvana Corporation plans to finance the project with $120,000 of equity and $300,000 of debt. Assuming the discount rates of both equity and debt are 0%. What is the expected cash flow to Husqvana Corporationâ s creditors if the company invests in the project?

   A.		$384,000
   B.		$300,000
   C.		$284,000
   D.		$0
   E.		$260,000

3. Marcy Company had a current share price of $52.40, and the firm had 1,500,000 shares of stock outstanding. The company is considering an investment project that requires an immediate $12,600,000 investment but will produce a single cash flow of $25,800,000 after 5 years then close. If Marcy invests in the project, what would the new stock price be? Marcy' cost of capital is 12%. (Hint: calculate the project NPV then consider how the project NPV affects stock price)

   A.		$52.51
   B.		$52.74
   C.		$53.07
   D.		$53.42
   E.		$53.76

4. Which one of the following is least likely to encourage managers to act in the best interest of shareholders?

   A.		Shareholder election of the board of directors, who in turn select managers
   B.		Threat of a takeover by another firm
   C.		Linking manager compensation to share value
   D.		Compensating managers with fixed salaries
   E.		Compensating managers with stock options

Answer 1

Answer:

1. NPV affects the stock price. If the NPV is positive, the stock price will move upwards whereas if the NPV is negative, the stock price moves down significantly.
In the question, it is question it is given that a negative NPV is realied,
therefore, negative NPV per share = -140,000/700,000 = -0.20
Therefore, the new stock price = $(42.70- 0.20) = $42.50
Therefore, the answer is D. $42.50

2. The cost of debt and equity is 0%. It will be favourable for the company.
Therefore, the expected cash flow = $640000*60% = $384000
Therefore, the answer is A. $384000

3. NPV of the project = Present Value of the cash inflow - Initial Investment
= 25,800,000 PVIF (12%,5) - 12,600,000 = $2039612.88
Since the NPV is positive, therefore, the share price will go up i.e. a positive NPV will affect the share price positively.
NPV per share = $2039612.88 / 1,500,000 = $1.36
Therefore, new share price = $ (52.40+1.36) = $53.76
Therefore, answer is E. $53.76

4. The answer is D. Compensating the managers with fixed salaries
It is because that the managers are already getting fixed salaries irrespective of anything going in the organization. So, compensating them with fixed salaries will not serve as a motivation for them to act in the best interest of the shareholders.