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Mini Case 2 You have just graduated from the MBA program of a large of a large university, and one of your favorite course was “Todays Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $1 million to do with as you pleased. You are not an inventor, and you do not have a trade skill that you can market; however, you have decided that you would like to purchase at least one established franchise in the fast-foods area, maybe two (if possible). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is3 years. After 3 years you will go on to something else. You have narrowed your selection down to two choices: (1) Franchise L, Lisa’s Soups, Salads, & Stuff, and (2) Franchise S, Sam’s Fabulous Fried Chicken. The net cash flow shown below include the price you would receive for selling the franchise in year 3 and the forecast flow each franchise will do over the 3-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health-conscious, while Franchise S’s cash flows will start off high but will trail off as other chicken competitors enter the marketplace and as people become more health-conscious and avoid fried foods. Franchise L. serves breakfast and lunch whereas Franchise S serves only dinner, so it is possible for you to invest in bother franchises. You see these franchise as perfect complements to one another: you could attract both the lunch and dinner crowds and the health- conscious and not-so-health-conscious crowds without the franchises directly competing against one another. Here are the net cash flows (in thousands of dollars) Expected Net Cash Flows Year Franchise Franchise S 0 - $100 - $100 1 10 70 2 60 50 3 80 20 Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows. You also have made subjective risk assessments of each franchise and concluded that both franchise have risk characteristics that require a return of 10. You must now determine whether one or both of the franchises should be accepted. a. What is capital Budgeting? b. What is the difference between independent and mutually exclusive projects? c. (1) Define the term net present value (NPV). What is each franchise’s NPV? (2) What is the rationale behind the NPV method? According to NPV, which franchise or franchise should be accepted if they are independent? Mutually exclusive (3) Would the NPV’s change if the cost of capital changed?
The real risk-free rate is 3.15%. Inflation is expected to be 2.6% this year, 4.65% next year, and then 2.15% thereafter. The maturity risk premium is estimated to be 0.05(t - 1)%, where t = number of years to maturity. What is the yield on a 7-year ..
A European call option allows one to purchase 2 shares of stock B with 1 share of stock A at the end of a year. A European put option which allows one to sell 2 shares of stock B for 1 share of stock A costs 11.5. Determine the premium of the Europea..
problem 1what pairing of options would come closest to achieving the same risk management attributes of a eurusd six
blades plc is a u.k.-based company that has been incorporated in the united kingdom for three years. blades are a
Johnson Products earned $3.10 per share last year and it paid out $.75 dividend. The company’s ROE is 16%. a) Calculate the dividend payout ratio; b) Calculate the sustainable growth rate of the company.
Aspen Company is financed with $50 million of 8% debt and $75 million of common equity. The firm has 1 million shares of common stock outstanding. Aspen needs to raise $20 million and is undecided between two possible plans for raising this capital: ..
RealTurf is considering purchasing an automatic sprinkler system for its sod farm by borrowing the entire $20,000 purchase price. The loan would be repaid with four equal annual payments at an interest rate of 12%/year.
Mr. Smith has saved $1,800 each year for 20 years. A year after the saving period ended, Mr. Smith withdrew $7,500 each year for a period of 5 years. In the sixth and seventh years, he only withdrew $5,000 per year. In the eighth year, he decided to ..
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 18 percent. Year Project M Project N 0 –$137,000 –$368,000 1 64,800 146,000 2 82,800 193,000 3 73,800 131,000 4 59,800 123,000 re..
A project will require $498,000 for fixed assets and $58,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the five year life of the project. What is the amount of the annual operating cash flow..
Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. Calculate the NPV of this investment and determine if the project should be rejected..
What are the monthly payments for the 4 traditional mortgages, the bullet and the IO loans? If the Storys want the lowest monthly payment, which alternative is the best? Which of the 10 options (4 traditional, 4 smart, bullet and IO) would be chosen ..
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