RFG is considering a major expansion that will result in a more diversified business model. At present, RFG's market capitalisation is $240 million. This is based on a beta of 1.6. The risk free rate is 4% and the market rate of return is 9%. RFG is financed entirely by equity. The company generates an annual cash surplus of $28.8 million.The expansion will cost $50 million and will generate future cash flows of $12 million in perpetuity.This new business will reduce RFG's beta to 1.4.Calculate the adjusted present value of the expansion.
Answer(s): A
A has an opportunity to invest $90,000 in a project that is expected to generate annual cash inflows of $60,000 for each of the next three years. The project's beta coefficient implies a discount rate of 12% for this project, based on a risk-free rate of return of 3%. A is prepared to forego the expected cash flows from this project in return for a guaranteed payment of $50,000 at the end of year 1, $42,000 at the end of year 2 and $30,000 at the end of year 3.What is the certainty equivalent value of this opportunity to A?
Answer(s): B
A project has an NPV of £1,200,000. The present value of material costs which are included in the NPV calculation are £8,000,000.What is the sensitivity of the project to changes in material costs? Give your answer to the nearest whole percentage.
Which of the following best describes the conflict between maximising profit and maximising shareholder wealth?
Answer(s): D
The board of OKN is considering an investment opportunity that will require the company to borrow a large amount in month 10 of the current financial year and to invest it immediately in property, plant and equipment. This investment has a positive net present value that justifies the risk, but the directors are reluctant to invest in the project.Why might the directors be reluctant?
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