Question

In: Finance

Xia Corporation is a company whose sole assets are $ 100, 000 in cash and three...

Xia Corporation is a company whose sole assets are $ 100, 000 in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows:

Project Cash Flow Today Cash Flow in One Year

A -$ 21,000 $ 27,000

B -$15,000 $30,000

C -$ 56,000 $ 82,000

Xia plans to invest any unused cash today at the risk-free interest rate of 10.6 %. In one year, all cash will be paid to investors and the company will be shut down. a. What is the NPV of each project? Which projects should Xia undertake and how much cash should it retain? b. What is the total value of Xia's assets (projects and cash) today? c. What cash flows will the investors in Xia receive? Based on these cash flows, what is the value of Xia today? d. Suppose Xia pays any unused cash to investors today, rather than investing it. What are the cash flows to investors in this case? Based on these cash flows, what is the value of Xia today? e. Explain the relationship in your answers to parts (b), (c), and (d).

Expert Solution

a). Project NPVs: Since the projects are risk-free, the discount rate will be the risk-free interest rate of 10.6%

Project	CF0	CF1	PV of CF1 CF1/(1+10.6%)	NPV (CF0 + PV of CF1)
A	(21,000.00)	27,000.00	24,412.30	3,412.30
B	(15,000.00)	30,000.00	27,124.77	12,124.77
C	(56,000.00)	82,000.00	74,141.05	18,141.05

Total investment required in the three projects = 21,000 + 15,000 + 56,000 = 92,000

Since the company has 100,000 in cash, it can invest in all three projects (all three have positive NPVs). Retained cash will then be 100,000 - 92,000 = 8,000

b). Total value of Xia today = total cash + project NPVs

= 100,000 + 3,412.30 + 12,124.77 + 18,141.05 = 133,678.12

c). After 1 year, investors will receive the cash flows from the projects and the total amount of retained cash invested at 10.6% for a year

= 27,000 + 30,000 + 82,000 + (8,000*(1+10.6%)) = 139,000 + 8,848 = 147,848

Based on the cash flow of 147,848 after 1 year, the value of the company today is the present value of 147,848 which is

147,848/(1+10.6%) = 133,678.12

d). If investors receive the retained cash today and the cash flows from the projects after 1 year then the cash flows will be:

Cash flow today (CF0) = 8,000

Cash flow after 1 year (CF1) = 27,000 + 30,000 + 82,000 = 139,000

Value of the company today = 8,000 + 139,000/(1+10.6%) = 8,000 + 125,678.12 = 133,678.12

e). The answers for parts b,c and d are the same. This is so because the timing of the cash flows is irrelevant. The value of the company will always be the sum of the present value of all future cash flows. If the company pays retained cash (8,000) to its investors today then they can obtain the same amount by investing it at 10.6% for a year (8,848). Similarly, they can borrow 8,000 today against the expected future cash flow of 8,848.

jeff jeffy answered 5 months ago

The last balance sheet of Lotus company is as follows Assets: Current Assets: 20 000 000...

The last balance sheet of Lotus company is as follows Assets: Current Assets: 20 000 000 Long-Term Assets: 80 000 000 Total Assets: 100 000 000 Liability and Equity Account Payables: 4 000 000 Accrued Expenses: 1 000 000 Short-Term Loan: 15 000 000 Long Term Loan: 50 000 000 Equity as Common Stock: 30 000 000 Total Liab. and Equity: 100 000 000 This firm do not have any outstanding preferred stocks. a) What is the total amount of...

Table 1 - Burnham Inc. Balance Sheets Assets 2017 2018 2019e ($‘000) ($‘000) ($‘000) Cash 8,500...

Table 1 - Burnham Inc. Balance Sheets Assets 2017 2018 2019e ($‘000) ($‘000) ($‘000) Cash 8,500 8,800 16,000 Short-Term Investments 50,600 21,500 73,000 Accounts Receivable 352,400 654,300 886,000 Inventories 717,400 1,290,800 1,520,000 Total Current Assets 1,128,900 1,975,400 2,495,000 Gross Fixed Assets 491,500 501,500 701,500 Less: Accumulated Depreciation 147,700 264,400 384,500 Net Fixed Assets 639,200 765,900 1,086,000 Total Assets 1,768,100 2,741,300 3,581,000 Liabilities And Equity 2017 2018 2019e ($‘000) ($‘000) ($‘000) Accounts Payable 145,800 324,500 361,600 Notes Payable 201,800 702,000 802,000...

Q3) Three methods of supplying a 100 000 MJ workload and a 300 000 MJ heat...

Q3) Three methods of supplying a 100 000 MJ workload and a 300 000 MJ heat load to a new shopping mall are to be compared. Work in the form of electricity is available from the National grid at 5c per MJ and heat in the form of hydr-carbon fuel is available at a cost of 2 cper MJ The three methods are, Electricity purchased for both Heat load and work load, Using a 25% efficient fuel burning heat engine...

Wilko Ltd had cash and cash equivalents at 1 July 2016 of $100 000. The transactions...

Wilko Ltd had cash and cash equivalents at 1 July 2016 of $100 000. The transactions of Wilko Ltd for the year to 30 June 2017 are as follows: 1. Borrowed $30 000 with a 6-month loan payable 2. Received $380 000 cash for customer accounts 3. Sold for $40 000 cash a plant asset with a carrying amount of $30 000 4. Issued ordinary shares for $120 000 cash 5. Purchased a plant asset for $87 000; $27 000...

Higginbotham, INC Balance Sheet ($000) Assets Liabilities and Stockholder’s Equity Cash

Higginbotham, INC Balance Sheet ($000) Assets Liabilities and Stockholder’s Equity Cash $ 1,500 Marketable Securities 2,500 Accounts Receivable 15,000 Inventory 33,000 Tot. Curr. Assets $52,000 Fixed Assets (net) 35,000 Total Assets $87,000 Accounts Payable $12,500 Notes Payable 12,500 Tot. Current Liab. $25,000 Long-term Debt 22,000 Total Liabilities $47,000 Common Stock (par) 5,000 Paid-in Capital 18,000 Retained Earnings 17,000 Total Stock Equity $40,000 Tot Liab. And Stockholder Equity $87,000 Higginbotham, INC Income Statement ($000)...

The company was established with authorized capital 300 000$, of which 200 000$ were in cash,...

The company was established with authorized capital 300 000$, of which 200 000$ were in cash, 60 000$ was in Building, 40 000$ was in equipment. The company has employees with salary 15 000$. During the week the company acquired a car for company needs, by the price 20 000$ and paid in cash the full amount. Then it obtained office supplies from Intellect LLC by the price 2000$, but paid 20% in cash. In order to get familiar to...

Project cost $100 000 Estimated life 5 years Estimated residual value $20 000 Annual Net Cash...

Project cost $100 000 Estimated life 5 years Estimated residual value $20 000 Annual Net Cash flow $30 000 Required rate of return 10% Given the data above, calculate the internal rate of return (IRR). (not using excel)

Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and...

Joe Tucker is the sole shareholder of Tucker Parts Inc. The corporation is cash rich, and Joe wishes to sell his stock to Bill Corker, who has limited funds. The parties proceeds are as follows: a. Joe sells 40 percent of his stock to bill for $50,000 payble over 10 years. b. Tucker Parts redeems the remaining 60 percent of Joe's stock for $75,000 in cash. What are the tax consequences to Joe? Does it make any difference if the...

Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange...

Tom incorporates his sole proprietorship as Total Corporation and transfers its assets to Total in exchange for all 100 shares of Total stock and four $10,000 interest-bearing notes. The stock has a $125,000 FMV. The notes mature consecutively on the first four anniversaries of the incorporation date. The assets transferred are as follows: Assets Adjusted Basis FMV Cash $ 5,000 $ 5,000 Equipment $130,000 Minus: Accumulated depreciation (70,000) 60,000 90,000 Building $100,000 Minus: Accumulated depreciation (49,000) 51,000 40,000 Land 24,000...

2019 ‘000 US$ 2018 ‘000 US$ Assets Non-current assets Property, plant and equipment Right of use...

2019 ‘000 US$ 2018 ‘000 US$ Assets Non-current assets Property, plant and equipment Right of use assets Investment properties Intangible assets and goodwill Investment in equity accounted investees Other investments Accounts receivable and prepayments 12,226,735 2,080,908 1,672,911 10,054,701 2,200.252 20,009 675,845 8,960,782 - 1,622,130 8,833,151 2,101,425 51,078 574,570 Total non-current assets 28,931,361 22,143,136 Current assets Inventories Properties held for development and sales* Accounts receivable and prepayments Cash and cash equivalents 156,393 194,612 1,836,795 2,943,359 115,590 261,724 1,378,179 2,614,710 Total current...