Question

1. A project has the following cash flows: C₀ = -200,000; C₁ = 50,000; C₂ = 100,000; C₃ = 150,000. If the discount rate changes from 10% to 15%, the CHANGE in the NPV of the project is closest to:

	A.	$23,076 increase
	B.	$23,076 decrease
	C.	$9,667 decrease
	D.	$9,667 increase
	E.	None of the above

2.

Companies A and B are valued as follows:

Both companies are 100% equity financed. Company A now acquires B by offering two (new) shares of A for every three shares of Company B. Suppose that the merger really does increase the value of the combined firms by $18,000. What is the net gain to target shareholders?

	A.	$4,000
	B.	$0
	C.	$17,000
	D.	$1,000
	E.	None of the above

Answer 1

Dear student, only one question is allowed at a time. I am answering the first question

1)

Present value factor

= 1 / ( 1 + Rate of Interest ) ^ Number of years

So, PV Factor for year 2 when interest rate is 10% will be

= 1 / ( 1.10 ) ^ 2

= 1 / 1.21

= 0.826446

The following table shows the calculations

So, change in net present value

= Final – Initial

= $ 17,720.06 - $ 40,796.39

= - $ 23,076.33 or -$ 23,076 or $ 23,076 decrease

So, as per above discussion, option B is the correct option