FINC 422 Problem Set 4 Chapter 12

Dr. Hall

1. Consider a project that will make four annual payments of $300k, but costs $1m up front. Calculate the IRR and answer whether the project should be accepted if the market rate is 10%.

2. Calculate the MIRR of the project from question 1, assuming the firms WACC is 8%.

2. What is the profitability index of a project with three cash flows of $400k each if it costs $950k, assuming the discount rate is 12%?

4. What is the NPV of a project that makes five annual payments of $500k, assuming it costs $2m?

5. In general, why is MIRR better than IRR?

6. Are there any advantages to the payback period analytical method?

Chapter 25 7. (a) What is the difference between common law and civil law in terms of the ability of judges to have flexibility in enforcing the absolute priority rule?

(b) What do you think such judicial flexibility does to the debt and equity cost of capital for firms located in countries with civil law traditions?

8. In the event of Chapter 7 bankruptcy in the US, how many claimants are ahead of common stockholders in terms of obtaining value from the liquidated assets of the firm?

9. What is a cram down procedure, and what sort of claimant is most likely to be affected by it?

10. Consider a firm with right-hand side of the balance sheet equal to $100 million, if it has working capital of $5 million, retained earnings of $1 million, EBIT of $15 million, market value of equity (based on estimates) of $10 million, and sales of $20 million? (a) What is the value of its debt?

(b) What is the firms Z-score?

(c) What is the likelihood that the firm will fail soon?