Capital Budgeting Valuation Financial Analysis For Todays Investment Projects 1st Edition H. Kent Baker, Philip English - Solutions

Discover comprehensive solutions and step-by-step answers for "Capital Budgeting Valuation Financial Analysis For Today's Investment Projects" by H. Kent Baker and Philip English. Our online platform offers a complete solutions manual and test bank, featuring chapter solutions and solved problems for this essential textbook. Access answers and instructor manuals, ensuring thorough understanding with detailed questions and answers. Download solutions in PDF format for free, and enhance your learning experience with our expertly crafted answer key. Whether you're a student or instructor, find everything you need to excel in financial analysis and capital budgeting.

In terms of process, what requisites or factors are important to start implementing the MCA methodology for private sector investment decisions?
What are some advantages for investors if they consider other effects of their investment other than a purely monetary return? Consider the case of investments in new transport technology projects.
What is the relationship between the NPV criterion and MCA?
Multicriteria decision-making tools appear more relevant for use in the public versus the private sector. What reasons might help explain this discrepancy?
What impact does the new approach on pricing process and due diligence have?
Explain the role of due diligence teams in an M&A.
Describe the different steps in the valuation process of company C based on a system theoretical approach.
Explain why conventional methods of corporate valuation (asset-oriented and income-oriented approaches) are not very well suited for valuation of the merged company C. Use the concepts of system theory and value additivity as well as implicit and explicit knowledge in the explanation.
How is success of a merger defined in general? Taking into account a fair distribution of the total synergy between shareholder groups A and B, what does “success” mean?
Discuss whether horizontal, vertical, and conglomerate merger types involve different types of synergy.
Define the term “synergy” for M&A activity and explain why synergy is the most important variable in M&A pricing.
Is the hypothesis of one unique discount rate for financing and investing appropriate for capital budgeting? How can this hypothesis be generalized?
What is the role of hurdle rates in behavioral capital budgeting?
Which cognitive and organizational biases affect the representation of cash flows to be employed in capital budgeting?
What are the basic tenets of prospect theory? Why is this theory so important for behavioral finance?
Provide a brief overview of the stages of change in government capital budgeting practices.
Discuss the need for clear rules and procedures in the appraisal of government capital projects.
How can LICs achieve improvement in their capital budgeting practices, and what would be the most crucial for success?
Sarraf (2005) and Webber (2007) explain the existence of “dual budgets” in many countries as part of the public financial management structures established by colonial administrations before the 1960s. Why did these dual budgets continue to function even after the demise of the colonial powers
A company targets a debt ratio of 40 percent. Recently, analysts within the company have assessed a project with both standard WACC and equity residual methods. To apply the latter, analysts considered that the capital borrowed amounted to 40 percent of the project’s investment cost. When
Management is assessing an investment opportunity that takes place in a country where the company currently has no activity. This project is expected to generate a negative taxable income during several early years, which would cause the postponement of interest tax shields. How should the
An analyst within a company computes a project’s NPV from the shareholders’perspective. In evaluating the project, the analyst uses the company’s 12 percent cost of equity capital. The analyst first uses the equity residual method, and then checks the results with the displaced equity method.
A company uses the BTWACC method to assess investment projects. Its management has set the value of the discount rate. Analysts are currently studying a project that would be partly financed by a loan whose interest rate is still unknown. They carry out a sensitivity analysis and find that the
An international oil company is studying an oil-field development project in Norway. In this country, interest payments are deductible from the taxable income. Because the local tax rate is especially high, the after-tax cost of debt is less than in other countries. Could the project be valued
Because using the true market portfolio is impossible, the CAPM does not provide an accurate estimate of a firm’s or project’s cost of equity capital. Hence, should practitioners adjust their cost of equity capital when using the CAPM and, if so, how?
Building on Roll’s (1977) critique, will financial economists ever be able to appropriately test the CAPM? Why or why not?
Is the equity risk premium likely to increase or decrease in the future? Why?
Does the equity risk premium (expected, not ex post) vary from country to country? Why or why not?
Why have multifactor asset-pricing models failed to become popular with practitioners?
A manager contends that a firm should use historical or book weights when estimating a firm’s WACC because they are easily observable and can guide the estimation process. Provide a counter to this argument for a rapidly growing firm that raises large amounts of external capital. Would the answer
An analyst makes the following statement: “A firm should add the total capital raised in a convertible bond issue to its debt balance when estimating the cost of capital and should ignore the equity portion until the bonds have been converted, at which time the firm should add the proportion of
Reconcile the choice between using the realized historical risk premium versus a forward-looking risk premium when estimating a project’s cost of equity?
What are the guidelines for choosing the risk-free rate?
Is the value of a rainbow option likely to equal the sum of the individual options valued independently of each other?
If an option to expand operations within a project is highly valuable, how valuable is the option to abandon within the project?
If management could open and close a mine immediately with an associated cost, explain whether a mine would ever operate at a loss.
Suppose a project requires a $10 million initial outlay to produce a guaranteed future cash flow of $12 million one year from today. Assume the appropriate discount rate is 10 percent annually today, which will decrease to 8 percent annually next year. Is there value in waiting to execute the
How does the futures/forward price “anchor” DCF valuation when valuing options using risk-neutral pricing?
Why is the discount rate for an entire risky project an inappropriate discount rate for individual future cash flows within the project?
What is a rainbow option?
How can real options analysis be valuable to a decision maker without computing a nominal value from an option?
When would a firm want to use an option to contract or expand operations?
How does the ability to make a series of small investments in a project over time create value when compared to making one large initial investment into a project?
How does management discretion potentially add value to a project?
What is the “underinvestment” problem posed by Myers (1977)?
What input variable does the “compact” pro forma model have available for simulation that is unavailable in the traditional pro forma model? Assume a finite number of cash flows.
Based on Exhibit 15.5, what input variable most affects the NPV and has there been any effect due to price and variable cost being correlated?
Based on Exhibit 15.3, what input variable affects the NPV the most?
When comparing Exhibits 15.3 and 15.5, what is the approximate probability that the NPV is higher than $600,000?
If an NPV analysis is based on the mean or expected values for cash flow inputs, how is likelihood of the mean NPV actually occurring affected by an increase in variance in the NPV distribution? Assume a symmetric distribution.
Based on the simulation output in Exhibits 15.3 through 15.6, what is the effect of variable costs being correlated with selling price on the range of values for the NPV of the project?
When calculating IRRequity, project sponsors may be unable to use FCFE for the calculation. Indicate why this is not always possible and how project shareholders can maximize their payoffs in these cases.
Cover ratios are financial covenants that creditors require as an element of credit risk mitigation. Discuss if and how an effective risk management program can influence the minimum level of cover ratios required by lenders.
From the point of view of project shareholders and lenders, deal sustainability is evaluated with different criteria. Discuss similarities and differences between the two categories of project stakeholders.
Risk management is crucial in project finance transactions. Discuss how to use the network of contracts set up by the SPV linking it to the different contractual counterparties as an effective risk management tool.
How can the concept of an insurance premium be used to estimate political risk?
How has the CAPM been modified to account for political risk?
How can analysts incorporate political risk into the capital budgeting process?
Compare the advantages and disadvantages of the comparative, analytical, and econometric techniques for assessing political risk.
Why has the concept of political risk been so difficult to define?
Compare and contrast the CE and RADR methods. Can these two methods provide the same adjusted NPV? Why or why not?
Millennium Catering Company is considering two mutually exclusive investments. The company wants to use the RADR method in its analysis. Millennium’s WACC is 15 percent, which is similar to the total market return using the CAPM. The risk-free rate of return is 7 percent. Analysts provide the
The expected cash flows and standard deviations are as follows:Standard Year Cash Flow Deviation 1 $140,000 $15,000 2 160,000 50,000 3 300,000 100,000 4 400,000 120,000 The firm’s WACC is 16 percent and the risk-free rate is 6 percent. The analyst develops the following CEFs.Certainty Equivalent
A company wants to replace a machine with a modern, more efficient model with a longer life expectancy. The equipment requires an initial investment of $600,000 in Year
List the basic steps involved in using risk-adjusted discount rates to obtain an adjusted NPV. How does this process relate to the CAPM?
List the basic steps involved in using the CE method to incorporate risk in the capital budgeting process.
Many authors insist that by using real discount rates and real cash flows they obtain the same results as if using nominal rates and flows. However, an ambiguity exists in the definition of the “real” WACC. First, real WACC can be defined in terms of real parameters. Second, real WACC can be
Typically, annual depreciation allowances are not indexed to inflation. What is the impact of inflation on the tax savings from the annual depreciation allowances?
Assume that the cost of debt is fully indexed to the expected positive inflation rate so that the NPV of the loan and loan repayment, discounted by the cost of debt, is zero. What is the present value of the interest payments in the presence of inflation, relative to the case where the expected
Assume that the annual revenues increase at the expected inflation rate of 5 percent and that accounts receivable are 10 percent of the annual revenues. What is the impact of the expected positive inflation rate on the present value of the cash receipts, relative to an expected inflation rate of 0
The constant prices approach assumes that the expected real increase in prices is zero. Briefly discuss an example where this assumption is invalid.
What are some reasons that may explain the pervasive use of the payback period method to evaluate investment opportunities?
List three methods commonly used to adjust for project risk in the capital budgeting process and discuss why these methods might be appropriate.
Does including the tax consequences of estimated future cash flows in DCF models likely increase, decrease, or have no effect on a project’s NPV? Explain.
A proposed project has a negative NPV. Does this mean that the project has a negative IRR? Why or why not?
Based on survey findings, identify several areas in which the gap between theory and practice has narrowed over the years and other areas in which a gap continues to exist.
Capital rationing might be internally or externally imposed. Briefly discuss two major information-asymmetry–based explanations for the existence of internal capital rationing.
Why, in theory, might capital rationing run counter to the goal of shareholder wealth maximization?
Survey findings about capital budgeting selection techniques used by firms imply several apparent departures from theory. Explain two of these deviations.
Of the four major stages of the capital budgeting process, which stage is the most difficult but most crucial for making correct capital budgeting decisions?Which stage is the most extensively researched in surveys?
What are several inherent shortcomings with survey-based research?
Discuss how alternative formal and informal control mechanisms can affect the adoption of PCA and the sophistication of PCA systems.
Who would be the most suitable person or team to conduct PCA? What are the pros and cons of the different alternatives?
For what reason might PCA have only a minor role in assisting correction/abandonment decision making of ongoing investment projects?
What kinds of organizational learning can PCA facilitate?
An Australian firm, National Boomerang Beer (NBB), is preparing to enter the Litoromian market, which it considers a greenfield investment (startup).The Litoromian beer market is fragmented. Only a few firms have substantial market shares, none of which exceed 5 percent. In fact, the market is
“Since I want to behave as a good local citizen, I am not really interested in foreign exchange rates,” the financial director of ESH said in regards to a foreign investment. Others in the firm disagree with this statement. Comment on this attitude.
U.S. firms are typically less interested in the payback periods of foreign investments than, for example, German firms. Relate this to U.S. domestic depreciation practices.
“The financial modeling of foreign investments is a matter of sensitivity analysis and scenario analysis. This is not necessarily the case for domestic investments.”Is this statement true? Why or why not?
A business development manager of a financial institution that was enthusiastically capturing Eastern European markets commented as follows: “Yes, we do make some basic calculations. But no, we do not discuss our ideas with the financial department beforehand. However, now that you mention it,
Explain the assumptions of human behavior regarding the three different arguments in the literature on the possible effects of competition on the level of misreporting of divisional managers toward headquarters. Why may some of the assumptions not hold in a setting with multiple periods and
Research on the effects of capital rationing is relatively scarce. Different streams of literature provide different results about the effects of competition on reporting behavior of managers. Explain the different streams of the literature.
What are possible reasons to apply capital rationing in highly heterogeneous organizations and highly homogeneous organizations?
Discuss the trade-off between more competition among parts of an organization as a consequence of capital rationing and the perceived benefits of capital rationing.
A main purpose of capital rationing is to control and reduce agency costs in the process of capital budgeting. Explain agency costs in the context of capital budgeting and how capital rationing can help to reduce and control these costs.
Why must the MIRR agree with an associated NPV analysis?
Consider a mining project in which there are costs to open the mine and to seal the mine at the end of the project. Consider the following cash flows for the project: −$3,787,879 initially, $8,712,121 one year from today, and −$5,000,000 two years from today. How many potential IRRs exist for
What causes a project to have multiple IRRs?
When considering two projects, what is Fisher’s rate of return?
What is Myers’s (1977) contention that makes firms short-term focused?

Showing 1 - 100 of 551

Capital Budgeting Valuation Financial Analysis For Todays Investment Projects 1st Edition H. Kent Baker, Philip English - Solutions

Step by Step Answers