Exercises in Financial Management

Résumé du document

In theory, managers should operate in the best interests of the owners, who are the stockholders within corporations. But currently, we can note that stockholders and managers do not have the same interests in the company. This is why, in practice, managers are operating in a different way that the one should be adopted by stockholders. As said by Jensen and Meckling, managers will make optimal decisions for stockholders only if appropriate incentives are given (like stock options for example). If we want that managers manage in the best way for stockholders, there is a need of managerial compensation, a direct shareholders intervention can be used and the threat of dismissal or acquisitions can be initiated in the company. Managers will thus have some common interests with stockholders.

Extraits

[...] What is the modified internal rate of return on each of these projects? a. The Net present value (NPV) is an indicator of how much value the project adds to the value of the firm. Project NPV = P + cash flows*(1+cost of capital) = -4000000+2000000/(1+ 0.10 )+1500000/(1+ 0.10 )²+1250000/(1+ 0.10 )^3+1000000/(1+ 0.10 = 680008.1962 Project NPV = -4000000+1000000/(1+ 0.10 )+1500000/(1+ 0.10 )²+1700000/(1+ 0.10 )^3+2400000/(1+ 0.10 = 1065227.785 Financial Management 14 Concerning the net present value, more it is higher, more the project will add to the value of the firm. [...]

[...] Financial Management 7 Question 5 You are trying to assess the value of a small retail store that is up for sale. The store generated a cash flow to its owner of $ 100,000 in the most year of operation, and is expected to have growth of about a year in perpetuity. a. If the rate of return required on this store is what would your assessment be of the value of the store? b. What would the growth rate need to be to justify a price of $ 2.5 million for this store? [...]

[...] Monthly interest rate = / 12 = Financial Management 5 Monthly payments = 200000/[1/ 0.0075 0.0075 1.0075 = 1609.25 My new monthly payments if I refinance my mortgage at are $ 1609.25 We can calculate the savings: 1754.55 - 1609.25 = 145.3 If I refinance my mortgage at I have a saving of $ 145.3 per month. c. I plan to stay 5 years in the house what wants to say 60 months (5*12). The opportunity cost is per year, so per month / 12). [...]

[...] In general, Financial Management 10 investors prefer to have a dividend as soon as possible because the risk of the reinvestment and so of the future revenue is considered higher. Nevertheless, if the economy is growing very rapidly, perhaps the company can be able to distribute a dividend but also to keep a part of the benefits to reinvest it. The company has to be attractive for investors and this solution will allow it to be attractive directly with the dividend but also for a long term thanks to the hopping benefits due to the present reinvestment. [...]

[...] Financial Management 17 b. To see which project is the best one using the internal rate of return, I will calculate it for each project: Project IRR - 10000+8000/(1+IRR)+7000/(1+IRR)² = 0 IRR = Project IRR 5000+5000/(1+IRR)-8000/(1+IRR)² = 0 IRR = Project IRR - 15000+10000/(1+IRR)+10000/(1+IRR)² = 0 IRR = The IRR has to be higher than the cost of capital which is 12%. It's the case for all the projects. The project A has the highest internal rate of return and it's why I will choose this one using this method. [...]