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Bowaite's Manufacturing has a current cash and marketable securities balance of $50 million. The company's economist is forecasting a 2-year recession. Free cash flows during the recession, which are normally distributed, are expected to total $70 million, with a standard deviation of $60 million. The company's marginal tax rate is 40 percent.
a. Under these conditions, what is the probability that Bowaite's will run out of cash during the recession?
b. Bowaite's is considering a major capital expansion project. If the project is undertaken, it will be financed initially with debt totaling $200 million. This debt financing will require after-tax cash outflows for debt service during the 2-year recession of $60 million.
If Bowaite's is willing to accept a 10 percent chance of running out of cash, should the expansion (with debt financing) be undertaken?
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During 2014, Raines Umbrella Corp. had sales of $660,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $500,000, $90,000, and $85,000, respectively. Suppose Raines Umbrella Corp. paid out $54,000 in cash div..
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