Finance Final Exam
Financial Leverage
% change EPS for % change in EBIT Depends on amount of debt or preferred stock
Operating leverage
% chg EBIT for % chg in Sales Greater fixed costs relative to variable costs - more leverage
CCC
(IP+ RP - PP) ...the need for external financing
Treatment of interest expense
- part of cost of capital. Do not include in calculation of operating cash flow.
Types of Incremental Cash Flow
Initial Operating Cash Flow Terminal Cash Flow
Planters Inc. is analyzing its cost structure. Its fixed operating costs are $470,000, its variable costs of $2.90 per unit produced and its products sell for $4.00 per unit. What is the company's breakeven point, i.e. at what unit sales volume would income equal costs?
Breakeven volume (units) = FC/(P-VC) = 470,000/(4-2.9) = 427,273
Cash Dividends
Desirability of stable vs volatile dividends Reducing the dividend sends undesirable signals Follow a policy of steadily increasing dividend - do not go in and out of cash dividends.
True or False: A lockbox plan is used to protect cash...to keep it from being stolen. False...it is used to speed up collection of checks...reduce collections float.
False
True or False: A project's NPV depends on the total amount of CFs the project produces, but because the cash flows are discounted at the cost of capital, it does not matter if the cash flows occur early or late in the project's life.
False
True or False: A project's NPV is generally found by compounding the cash flows at the cost of capital to find the terminal value (TV), then discounting the TV at the IRR to find its PV
False
Operating Breakeven Quantity
Fixed Costs / (Price per unit -Variable cost per unit)
How to calculate terminal salvage value cash flow
SV - ((SV-BV)(T)) or SV (1-T) if BV is 0
Repurchase Advantages
Shareholders can choose to sell or not - flexibility (whereas an immediate taxable event for Cash Div) Helps avoid setting a high cash dividend that may not be maintained Capital gains tax treatment may be less depending on tax bracket
What is the MM Theory?
Tax laws allow to deduct interest by levered firms, more CF to investors- debt shields some of CF from taxes. Higher corporate tax rates - increase target debt ratio Issue debt if low operating leverage
Shortage Costs/ Carrying Costs
Trade off with level of current assets
True or False: A decrease in the corporate tax rate is likely to encourage a company to use less debt in its capital structure
True
True or False: Beginning a new stock dividend reinvestment plan will enable a firm to raise additional equity capital.
True
Independent projects:
accept either or all
Mutually exclusive projects:
accept only one.
advantages of payback period
adjusts for uncertainty of later cash flows, biased toward liquidity
Definition of Incremental (Relevant) cash flows.
corporate cash flow WITH the project - corporate cash flow WITHOUT the project
take the project if the IRR is
greater than the required return (IRR unreliable with nonconventional cash flows or mutually exclusive projects)
Treatment of sunk costs
ignore. They don't change free cash flows.
disadvantages of pay back period
ignores the time value of money, requires arbitrary cutoff point, ignores cash flows beyond the cutoff date, biased against long-term projects, such as research and development, and new projects)
advantages of discounted payback
includes time value of money, easy to understand, and biased towards liquidity
Discounted Pay Back
length of time until initial investment is recovered on a discounted basis, take the project if it pays back in some specified period (arbitrary)
disadvantages of discounted payback
may reject positive NPV investments,, requires an arbitrary cutoff point, ignores cash flows beyond the cutoff point, and biased against long-term projects, such as R&D and new projects
How to minimize target cash balance float management
minimize collection float, maximize disbursement float
Optimal Capital Structure -
mix that produces highest firm value, minimizes the WACC - "u curve"
Financing CA Flexible (conservative)
more LT Debt; Pro Safety; Con Cost due to higher interest costs.
Financing CA Aggressive (flexible)
more ST Debt; Pro Cost due to lower interest costs; Con Liquidity Risk
Regarding Stock Dividends and Stock Splits Increase # of shares ->
pie is divided up into smaller pieces
Financing CA Match maturity
preferred, yet difficult to do in practice
How to minimize target cash balance Lockboxes
speeds up cash collections
MIRR (modified internal rate of return) definition, calculation, and rules
the discount rate that equates the present value of the terminal value of the inflows, compounded at the cost of capital, to the present value of the costs So, for PV of costs = 100.00 year1 = 10, year 2= 60, year 3 = 80.
payback period is
the number of years required to recover a project's cost (length of time until initial investment is recovered) take the project if it pays back within some specified period (arbitrary cutoff)
Profitability index
the present value of future cash flows divided by the initial cost; it measures the "bang for the buck" (useful when available investment funds are limited, but may lead to incorrect decisions in comparisons of mutually exclusive investments)
If sales (EBIT) is increasing,
use more debt (tax shield) - more earnings flow to investors, but the tradeoff of more financial risk - borne by common shareholder, requires increase in return (rs).
You just landed an internship in the CFO's office of Ryan Inc. Your first task is to estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow? Sales revenues $30,000 Cost of Goods Sold 15,000 Depreciation 8,000 Other operating costs 4,000 Tax rate 40%
Sales revenues $30,000 - Cost of Goods Sold 15,000 - Operating costs (excl depr) 4,000 - Depreciation 8,000 Operating income (EBIT) $ 3,000 Taxes (40%) 1,200 NOPAT $ 1, 800 + Depreciation 8,000 Cash Flow Year 1 $ 9,800
Jones Inc, the company you work for, is considering a new project whose data are shown below. What is the project's Year 1 cash flow? Sales revenues $62,500 Cost of Goods Sold 20,000 Depreciation 8,000 Other operating costs 5,000 Interest expense 8,000 Tax rate 40%
Sales revenues $62,500 -Cost of Goods Sold 20,000 -Operating costs (excl depr) 5,000 -Depreciation 8,000 Operating Income (EBIT) $29,500 Taxes (40%) 11,800 NOPAT $17,700 +Depreciation 8,000 Cash Flow Year 1 $25,700 Note: Interest expense should not be included as it is a financing cost.
NPV (net present value) definition, rules, and calculation
(CFn / (1+r)^N) - initial cost (do this for each cash flow, and r is the project's risk-adjusted cost of capital
Operating Cycle
(IP+ RP)
Definition of externalities
(erosion, cannibalism, complements)
Definition of opportunity costs
(foregone benefits)
Zeppelin Inc. is considering a project that has the following cash flow data. What is the project's IRR? Cash Flows: Year 0 ($2,500) Year 1 800 Year 2 600 Year 3 900 Year 4 1,500 Year 5 200
CF0 = ($2,500), CF1=$800, CF2=$600, CF3=$900, CF4=$1,500, CF5=$200 = 18.31%
Definition of "Residual Distribution Model"
Distribution = Net Income - [Target Equity Ratio X Capital Budget] Target Equity Ratio x Capital Budget = > Retained earnings In practice, do not follow rigidly, use longer forecast
Jennings Inc. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $50,000, of which 75% has been depreciated. The firm can sell the used equipment today for $15,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
Equipment Cost $50,000 Less Accum. Depreciation 37,500 Book Value of Equipment 12,500 Market Value of Equipment 15,000 Gain (loss) Mkt V - Book V 2,500 Taxes paid on gain (-) or credited (+) on loss -1,000 AT salvage value = Market value +/- taxes $14,000 AT Salvage = Salvage - T*(Salvage - Book) 15,000 - .4(15,000-12,500) = $14,000
True or False: Offering longer payment terms to customers reduces the CCC.
False
True or False: Reducing the AP deferral period will reduce the cash conversion cycle. False -> IP + AR - AP = CCC
False
True or False: Stockholders pay no income tax on dividends if the dividends are used to purchase stock through a dividend reinvestment plan.
False
True or False: The NPV method is regarded by most academics as being the best indicator of a project's profitability, hence, most academics recommend that firms only use this one method.
False
True or False: The NPV method was once a favorite of academics and business executives, but today, most authorities regard the MIRR as being the best indicator of a project's profitability.
False
True or False: The NPVs of relatively risky projects should be found using relatively low cost of capital.
False
True or False: The capital structure that minimizes a firm's WACC is also the capital structure that maximizes its stock price.
True
True or False: The firm's beta will be affected by an increase in the debt ratio
True
True or False: The firm's financial risk will be affected by an increase in the debt ratio.
True
Java Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period 50 days Average Collection period 17 days Payables deferral period 25 days
CCC = Inv. Conv Period + Avg. Coll Period - Pay Deferral Period = 42 days
Eastwood arranged a revolving credit agreement of $12,000,000 with a group of banks. The firm paid an annual commitment fee of .5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.75% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 4.00% during the year. If the firm borrowed $8,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?
Cost of used portion = Amt borrowed x Rate = 8,000,000 x 5.75% = $460,000 Cost of unused portion = Unused balance x fee = 4,000,000x .5% = 20,000 Total Annual Cost $480,000 Alternative solution: Rate per day = 5.75% / 365 = = .015753% Interest per day = (Rate per day)(Amt.borrowed) = $1,260 Interest per year = Interest per day x 365 = $459,900 Cost of unused portion = Unused balance x fee = $20,000 Total annual cost = $479,900
Yesshows Inc. is considering a project that has the following cash flow and cost of capital ( r) data. What is the project's NPV? r = 6.25% Cash Flows: Year 0 ($2,500) Year 1 800 Year 2 600 Year 3 900 Year 4 1,500 Year 5 200
CF0 = ($2,500), CF1=$800, CF2=$600, CF3=$900, CF4=$1,500, CF5=$200 = $859.46
RMK Inc.'s dividend policy is under review by its board. Its projected capital budget is $2,500,000, its target capital structure is 70% debt and 30% equity, and its forecasted net income is $875,000. If the company follows a residual dividend policy, what total dividends, if any , will it pay out?
Capital Budget $2,500,000 % Equity 30% Net Income (NI) $875,000 Dividends Paid = NI -[%Equity(Capital Budget)] $125,000
(THIS ONE IMPORTANT AND ON EXAM) The capital budget forecast for the Santana Company is $725,000. The CFO wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay dividends of $500,000. If the company follows the residual dividend policy, how much income must it earn, and what will its dividend payout ratio be?
Capital Budget $725,000 Equity Ratio 60% Dividends Paid $500,000 NI = Div + (EQ % * Cap Bud) = $935,000 Payout = Dividends / NI = 53.48%
The projected capital budget of Silverton Corp. is $1,500,000, its targeted capital structure is 55% debt and 45% equity, and its forecasted net income is $750,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
Capital budget $1,500,000 % Equity 45% Net Income $750,000 Dividends Paid = NI - (% Equity * Capital Budget) = $750,000 - (.45 * 1,500,000) = $75,000
OAR Inc. has a target capital structure of 35% debt and 65% equity. This year's capital budget is $850,000 and it wants to pay a dividend of $450,000. If the company follows a residual dividend policy, how much net income must it earn to meet its capital budgeting requirements and pay the dividend, all while keeping its capital structure in balance?
Capital budget $850,000 Equity ratio 65% Dividends to be paid $450,000 Required NI = Dividends + (% Equity * Capital Budget) 1,002,500 = 450,000 + (.65 * 850,000)
Genesis Inc. is considering a project that has the following cash flow and cost of capital ( r) data. What is the project's MIRR? r = 7.00% CF0 = ($2,500), CF1=$700, CF2=$700, CF3=$700, CF4=$700
Compound the future inflows at ( r) = $700(1.07)^3+$700(1.07)^2+$700(1.07)+$700 = $3,107.96 FV = 3,107.96 PV = (2,500) N = 4 MIRR = 5.59%
IRR (internal rate of return) definition, rules, and calculations
interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.
How to minimize target cash balance
lockboxes, float management, use of debit cards, electronic funds transfers
Thorton Inc's cost of goods sold (COGS) average $3,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is the inventory conversion period?
Inv Conv Period = Inv/ COGS per day = Inv/(Annual COGS/365) = 15.2 days Or 365/ (Annual COGS / Inv)= 365/(36,000,000/1,500,000)= 15.2
(THIS ONE IMPORTANT AND ON EXAM) Withrow Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle? Average Inventory $120,000 Annual Sales $750,000 Annual COGS $475,000 Average Accounts Receivable $210,000 Average Accounts Payable $ 35,000
Inv. Conv Period = Inv / (COGS/365) = 92.2 + DSO = Rec/ (Sales / 365) = 102.2 - Pay Deferral = Payables/ (COGS/365) = -26.9 Cash Conversion Cycle (CCC) = 167.5
A venture capital investment group received a proposal from Another Phone Co. to produce a new smart phone. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, fixed costs are estimated at $800,000, and the investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet this profit goal?
Price = Variable cost x 2 = $500 Volume (units) to meet profit goal = (FC + profit)/(P-VC)= 5,200 Check: Op Profit = (P-VC) x Units - FC = 500,000
Repurchase vs Cash Dividends
Repurchase - stock price doesn't fall at the time of repurchase, # of shares fall Cash Dividend - stock price falls by amount of dividend, # of shares don't change BOTH HAVE SAME EFFECT ON SHAREHOLDER WEALTH
(THIS ONE IMPORTANT AND ON EXAM) The following information has been presented to you about the Texas Corporation. Total Assets $4 bil Tax Rate 40% EBIT $925 mil Debt ratio 0% Interest Expense $0 WACC 9% Net Income $625 mil M/B ratio 1.00% (market/book) Share Price $40.00 EPS = DPS $4.25 The company has no growth opportunities (g = 0), so the company pays all of its earnings as dividends (EPS = DPS). The consultant believes that if the company moves to a capital structure financed with 20% debt and 80% equity (based on market values) that the cost of equity will increase to 10% and that the pre-tax cost of debt will be 8%. If the company makes this change, what would be the total market value ($mil) of the firm?
Step 1 : Find the new WACC: wc*rs + wd*(1-T)*rd = (.8)(.10)+(.2)(1-.4)(.08) = .0896 Step 2: Find the free cash flow: Because there is no growth, there is no investment in capital, hence FCF is equal to NOPAT FCF = NOPAT - Investment in capital = = EBIT (1-T) - 0 = = $925 (1-.4) = $555 Step 3: Find the new value of the firm: V = FCF / (WACC - g) = $555 / (.0896-0) = $6.2
True or False: Commercial paper is a form of short term financing that is primarily used by large, strong, financially stable companies.
True
True or False: If R&D efforts pay off and the company now has more high-return investments opportunities, this will most likely lead to a decrease in the firm's payout ratio.
True
True or False: In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the cost of capital. If interest were deducted when estimating cash flows, this would in effect, "double count" it.
True
True or False: Large stock repurchases financed by debt tend to increase EPS, but they also increase the firm's financial risk.
True
True or False: Stock repurchases can be used by a firm that wants to increase its debt ratio.
True
True or False: Take steps to reduce the inventory period to reduce the CCC
True
True or False: The NPV and IRR methods may give different recommendations regarding which of two mutually exclusive projects should be accepted, but they always give the same recommendations regarding the acceptability of a normal independent project.
True
True or False: The firm's target capital structure should be consistent with minimizing the WACC.
True
True or False: The higher the cost of capital to calculate the NPV, the lower the NPV.
True
True or False: Using accelerated depreciation rather than straight-line depreciation would normally have no effect on a project's total projected cash flows but it would have an effect on the timing of the cash flows and thus the NPV
True
Rollins Inc. expects to have the following data during the coming year. What is Rollins's expected ROE? Assets: $575,000 Debt/ Assets 55% Interest Rate 8% Tax Rate 40% EBIT $65,000
EBIT $65,000 - Interest (575,000 *.55*.08) 25,300 EBT 39,700 Taxes 15,880 NI 23,820 ROE (23,820 / 575,000 * .45) 9.21% Debt Effect on ROE ROE = ROA x Equity Multiplier = 4.143 x 2.222 = 9.21%
How to calculate operating cash flows
EBIT + Depr - Taxes or EBIT(1-T) + Depr o (Sales - Costs )(1-T)+Depr(T), if no interest expense
Yellow Pages Inc. is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $90,000. Its current cost of equity is 10% and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. Yellow Pages is considering changing its capital structure to one with 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be Yellow Pages's new value of operations?
WACC = wc*rs+wd(1-T)*rd = (.7)(.12)+(.3)(1-.4)(.08) = 9.84% V = FCF / WACC. Since g=0, FCF = NOPAT = EBIT (1-T) V = 90,000(1-.4)/.0984 = $548,780
Buffet Inc. is evaluating its capital budget. The company finances with debt and common equity, but because of market conditions, wants to avoid issuing any new common stock during the coming year. It is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $850,000, and its committed to maintaining a $2.00 dividend per share. Given these constraints, what percentage of the capital budget must be financed with debt?
EPS $3.00 Shares Outstanding 500,000 Div Per Share $2.00 Capital Budget $850,000 Net Income = EPS x Shares OS $1,500,000 Dividends paid = DPS X Shares OS $1,000,000 Retained Earnings Available $ 500,000 Capital Budget - RE = Debt Finance $ 350,000 Debt Needed/ Capital Budget = %Debt Financing 41.18%
True or False: An increase in the company's degree of operating leverage is likely to encourage a company to use more debt.
False
True or False: Capital budgeting decisions should be based on before-tax cash flows.
False
True or False: Identifying an externality can never lead to an increase in the calculated NPV.
False
True or False: If a company declares a 2 for 1 stock split, the stock price would roughly double.
False
True or False: If a firm finds that the cost of debt is less than the cost of equity, increasing its debt ratio must reduce it WACC.
False
True or False: If a project's NPV is > $0, then its IRR must be less than the cost of capital.
False
True or False: If the cost of capital declines, the lower the project's NPV
False
True or False: In the real world, dividends are usually changed every year to reflect earning changes, and these changes are randomly higher or lower, depending on whether earnings increase or decreased.
False
Regarding Stock Dividends and Stock Splits, stock price falls to
keep investor's wealth unchanged
IRR conflicts when mutually exclusive projects and non constant cash flows (sign changes more than once). In these cases,
disregard IRR and use the NPV rule.
You are evaluating the purchase of a proposed spectrometer for the R&D department. The base price is $170,000 and it would cost another $42,500 to modify the equipment for special use by the firm. The equipment falls into MACRS 3-year class and would be sold after 3 years for $68,000. The applicable depreciation rates are 33%, 45%, 15% and 7%. The equipment would require a $15,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $71,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. a. What is the initial investment outlay for the spectrometer, that is, what is the year 0 project cash flow? b.What are the project's annual cash flows in Years 1, 2 and 3. c. If the WACC is 12%, should the spectrometer be purchased?
Annual depreciation : Year 1: (170,000+42,500)*.33 = 70,125 Year 2: (170,000+42,500)*.45 = 95,625 Year 3: (170,000+42,500)*.15 = 31,875 Year 4: (170,000+42,500)*.07 = 14,875 After-tax salvage value @ end of year 3: Book value = 212,500 - (70,125+95,625+31,875) = 14,875 ATSV = SV - (SV-BV)*T = 68,000 - (68,00-14,875)*.4 = 68,000 - 21,250 = 46,750 Cash Flows Years 0 - 3: CF0 = -170,000-42,500-15,000 = -227,500 CF1 = 71,000*(1-.4) + 70,125*(.4) = 70,650 CF2 = 71,000*(1-.4) + 95,625*(.4) = 80,850 CF3 = 71,000*(1-.4) + 31,875*(.4)+ 15,000+46,750 = 117,100 NPV @ WACC of 12%: NPV = -227,500 + 70,650/(1.12) + 80,850/(1.12)^2 + 117,100/(1.12)^3 = -227,500 + 63,080 + 64,453+ 83,349 = - 16,618 Reject
Consider an asset that costs $640,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $175,000. If the marginal tax rate is 35%, what is the after-tax cash flow from the sale of this asset?
Annual depreciation = $640,000 / 8 = $80,000 After five years accumulated depreciation = 5*$80,000 = $400,000 Book value at end of year 5 = $640,000 - $400,000 = $240,000 The asset is sold at a loss to book value, so the depreciation tax shield of the loss is recaptured. After-tax salvage value = SV - (SV-BK)*T = $175,000 - ($175,000-$240,000)*.35 = $175,000 - (-$22,750) = $197,750
Dog Up! Franks is looking at a new sausage system with an installed cost of $480,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $70,000. The sausage system will save the firm $160,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of the project?
Annual depreciation charge = $480,000/5 = $96,000 After-tax salvage value = SV*(1-T) b/c book value = 0 = $70,000 *.66 = $46,200 Operating cash flow using tax shield approach: $160,000*(1-.34) + $96,000*.34 = $138,240 Find NPV @ 10% discount rate: NPV = -480,000-29,000 + PV Ord Annuity 138,240 at 10% for 5 years + (46,200+29,000)/(1.10)^5 = -509,000+524,038+ 46,693 = 61,731
Your firm is contemplating the purchase of a new $580,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $60,000 at the end of that time. You will save $210,000 before taxes per year in order processing costs, and will be able to reduce working capital by $75,000 (this is a one-time reduction). If the tax rate is 35%, what is the IRR for the project?
Annual depreciation charge = $580,000/5 = $116,000 After-tax salvage value = SV*(1-T) b/c book value = 0 = $60,000 *.65 = $39,000 Operating cash flow using tax shield approach: $210,000*(1-T) + $116,000*.35 = $177,100 Compute IRR where: NPV = 0 = -580,000 + 75,000 + PV Ord Annuity 177,100 5 years @IRR + PV Lump sum of 39,000 - 75000 / (I+IRR)^5 CF 0 = (505,000) C01 = 177,100 F01 = 4 C02 = 177,100 + 39,000 - 75,000 = 141,100 F02 = 1 CPT IRR = 20.94%
Mumford Inc. stock has increased significantly over the last five years, selling now for $175 per share. Management feels this price is too high for the average investor and wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?
No. of new shares per 1 old share = Current price / Target price = $175 / $25 = 7
Andrews Inc. buys on terms of 2/20, net 40. It does not take the discount, and generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
Nom. % Cost = Disc. % / (100-Disc %) x (365/Actual days - Disc Days) = .02/(.98) x (365/40) = 2.04 x 9.13 = 18.63%
Yesterday, Williams Investments was selling for $90 per share. Today, the company completed a 10 for 2 stock split. If the total market value was unchanged by the split , what is the price of the stock today?
Number of new shares 10 Number of old shares 2 Old (pre-split) price $90 New price = Old price x (Old shrs/New shrs) $ 18
Externalities can be favorable or unfavorable
Opportunity costs and externalities are relevant cash flows.
Financial Risk
based on borrowings (debt or preferred stock)
Operating Risk
based on type of business / assets
