Finance for decision making. not just answer, I need more details. Comment on th

Question

Finance for decision making. not just answer, I need more details.

Comment on the following statement: Companies should use as much debt as possible as it is cheaper than equity capital and the interest is tax deductible. Outline the various methods of acquiring other firms. ABC Electronics Ltd is considering the acquisition of XYZ Ltd at a cash price of $5,000,000. XYZ has short-term liabilities of $1,500,000. Asa result of acquiring XYZ Ltd, ABC Electronics would also acquire rights to one major patent which would provide an estimated cash inflow of $1,800,000 per year for the next eight years. The firm has a cost of capital of 12 per cent. Would you recommend the cash acquisition? Explain your answer. Two competing project proposals, 1 and 2 are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows: Estimated life Initial outlay Annual after-tax cash flows 3 years $200,0 0 0 $175,000 5 years $600,000 $260,000 Assume that projects 1 and 2 are of different risk levels to the firm; the financial manager has attributed a beta of 1 to Project 1 and a beta of 1.2 to Project 2. The riskfree rate of return is 5 per cent and the return on the market portfolio of assets is 15 per cent. The cost of capital of the company is 10 per cent. a Without adjusting for risk, which project is preferred based on the Annualised Net Present Value (ANPV) method? What is the appropriate risk-adjusted discount rate (RADR) to use for each project if the company is to use the RADR approach to evaluate the projects? With adjusting for risk, calculate the Annualised Net Present Value (ANPV) of both projects, and discuss which project is preferred.

Explanation / Answer

4.Debt increases the income of investers but increases the risk of the wonership . It should be used if the return on the asset created by the debt is more than the cost of the debt.

5a. The two main methods of acquiring a firm are : 1.By acquiring shares of the firm 2. By Liveraged buy out 3.Through friendly acquisition 4. Through Take over 5. Through merger.

5b.

Since the NPV is -ve , the project should not be taken up.

6.

Project-2 should be accepted as the return on investment is higher.

Description Year Cash Flow NPV@12% Cost of Asset 0 5000000 5000000 Short term liability 0 1500000 1500000 Income from Patent 1 1800000 1607143 Year1 2 1800000 1434949 3 1800000 1281204 4 1800000 1143933 5 1800000 1021368 6 1800000 911936 7 1800000 814228.6 8 1800000 726989.8 Net NPV (Outflow-Inflow) -2441752

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