Financial management (final exam) - Essay Example

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Financial management (final exam)

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. ...Show more

Summary

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…
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