Question

In: Finance

1. A project has the following cash flows: C0 = -200,000; C1 = 50,000; C2 =...

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

Solutions

Expert Solution

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


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