Melissa Buehrlen
Instructor Somers
Business Economics
06/13/2013
Chp. 17; Exercise Questions
The Benly Company needs to raise funds for a major expansion. The company is debating whether to issue stock or to issue bonds. If the company issues bonds, then its debts will increase and it will be under additional stress to ensure that its revenues can cover the costs of its debt. If it issues stock, the current owners will lose power and influence. What should the company do? Explain your answer.
What is the creditor-owner conflict? Explain why 100 percent equity might be inefficient. Explain why 100 percent debt might be inefficient.
The marketing director of National Midland Mortgage has been arguing with senior management about building a $50 million publishing facility. Other managers worried about the assumptions in the analysis that support the investment-an increase in the number of mortgages processed and a reduction in processing costs. What if the mortgage market did not grow as expected?
Bob Davies must decide whether to invest $100,000 in his own business or in another local business. Both investment projects have an expected life of five years. The cash flow of each is as follow:
Year
Davies
Other
1
$20,000
$10,000
2
$30,000
$10,000
3
$40,000
$30,000
4
$10,000
$40,000
5
$5,000
$50,000
Suppose the risk of the projects is the same and is accounted for by a risk premium of 6 percent per year. Would either investment make sense? Which would be better?
An oil company recently evaluated a proposed investment for improvements in a particular type of refining equipment. According to the analysis, such improvements would require an investment of $15 million and would result in an incremental after-tax cash flow of $2 million per year for nine years following the year of the investment.
If the discount rate is 10 percent, what is the net present value of this project?
If the discount rate is 15 percent, what is the net…