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Suppose that a firm has $700 of bonds outstanding, and its cash flows without a new project

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Suppose that a firm has $700 of bonds outstanding, and its cash flows without a new project will be as follows:


Suppose that the cash flows of the firm with a new project that costs $60 would be as follows:


If the managers are acting in the interests of the shareholders, will they accept this project? Why or whynot?

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FİRM wm1OUT A Nrw PROJECT Dollar Appreciation Dollar Depreciation Prohability 0.5 0.5 Value of Firm $600 800 Suppose that the cash flows of the firm with a new project that costs $60 would be as follows: FIRM WITH A NEW PROJECT Dollar Appreciation Dollar Deprecintion Probability 0.5 0.5 Value of Firm STOO $840

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If the managers do not take the project the value of the firm will be 700 60...View the full answer


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Mugdha Sisodiya
My self Mugdha Sisodiya from Chhattisgarh India. I have completed my Bachelors degree in 2015 and My Master in Commerce degree in 2016. I am having expertise in Management, Cost and Finance Accounts. Further I have completed my Chartered Accountant and working as a Professional. Since 2012 I am providing home tutions.
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International Financial Management

International Financial Management

ISBN: 978-0132162760

2nd edition

Authors: Geert Bekaert, Robert J. Hodrick

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Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.

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