financial management (final exam)

financial management (final exam) Essay example
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Finance & Accounting
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Part I Question 1 a) Cost of Equity Re = Rf + Beta (Market Risk Premium)   = 2% + 1.16 (3.5%) Re = 6.06% b) Weighted Average Cost of Capital WACC = [Wd x Rd(1-Tax Rate) + We x Re ]   = [0.30 x 0.07 x 0.6] + [0.7 x 0.0606]    = 5.50% c) Enterprise Value using Discounted Cash Flow Technique Years 0 1 2 3 Terminal Value Growth Rate 5.00% 3.00% 1.00% Cash Flows 65.00 30.00 31.50 32.45 819.24 Discount Factor (5.50%) 1.0000 0.9524 0.9070 0.8638 0.8227 Discounted Free Cash Flows 65.00 28.57 28.57 28.03 673.99 Enterprise Value 824.16         d) Enterprise Value using M&A Multiple Technique e) The difference between the two approaches of enterprise valuation exists because of several factors…

Introduction

Therefore, the results of both techniques will be different because of the differences between the assumptions of both techniques. Question 2 Part A a) Project A Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 3,000,000 7,000,000 9,000,000 15,000,000 Discount Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 Discounted Cash Flows (20,000,000) 2,777,778 6,001,372 7,144,490 11,025,448 Net Present Value 6,949,087 Project B Years 0 1 2 3 4 Initial Investment (20,000,000) Cash Flows 10,000,000 8,000,000 5,000,000 5,000,000 Discount Factor (8%) 1.0000 0.9259 0.8573 0.7938 0.7350 Discounted Cash Flows (20,000,000) 9,259,259 6,858,711 3,969,161 3,675,149 Net Present Value 3,762,280 Based on the above results it can be clearly observed that Project A has generated higher NPV therefore, it should be accepted. ...
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