Question

Consider two companies that are identical in terms of current operating cash flows and current capital...

Consider two companies that are identical in terms of current operating cash flows and current capital investment. They are also identical in terms of the rate of future growth in operating cash flows. The only difference is that company A has a higher rate of growth in capital expenditures than company B. Which company is more valuable, and why?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer:

Companies which are identical in terms of operating cash flows, current capital investment and if company A has higher rate of growth in capital expenditures than company B then company A will be more valuable because growth in CAPEX means, company is expanding its business. Company is buying fixed assets, it is setting up new plants and factories and it is also doing facility expansions. Expansion will boost the growth for the company in the future, company sales will increase so as the profits. Capital expenditures will not be reflected in only one accounting period rather it will be capitalized in several years. Higher capital expenditure is one time expenditure, it will affect the profits but it will provide growth to the company so Company A will be more valuable.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
In preparing a statement of cash flows, cash flows from operating activities a.   are always equal...
In preparing a statement of cash flows, cash flows from operating activities a.   are always equal to accrual accounting income. b.   are calculated as the difference between revenues and expenses. c.   can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash. d.   can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash. Explain in one...
Consider two​ firms, With and​ Without, that have identical assets that generate identical cash flows. Without...
Consider two​ firms, With and​ Without, that have identical assets that generate identical cash flows. Without is an allminus−equity ​firm, with 1 million shares outstanding that trade at a price of​ $24 per share. With has 2 million shares outstanding and​ $12 million of debt at an interest rate of​ 5%. Assume that​ MM's perfect capital markets conditions are met and that you can borrow and lend at the same​ 5% rate as With. You have​ $5000 of your own...
Consider two firms, with and without, that have identical assets that generate identical cash flows. Without...
Consider two firms, with and without, that have identical assets that generate identical cash flows. Without is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. With has 2 million shares outstanding and $12 million dollars in debt at an interest rate of 5%. a) Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With. You have $5000 of...
Consider the following statements about taxes and after-tax cash flows: I. Capital budgeting analyses should incorporate...
Consider the following statements about taxes and after-tax cash flows: I. Capital budgeting analyses should incorporate after-tax cash flows rather than before-tax cash flows. II. Added company revenues will result in lower taxes for a firm. III. Operating expenses may actually provide a tax benefit for an organization. Which of the above statements is (are) correct? Select one: a. I and II. b. I and III. c. I only. d. III only. e. II only.
Consider the following: Argument #1: The indirect method presents a firm’s operating cash receipts and payments...
Consider the following: Argument #1: The indirect method presents a firm’s operating cash receipts and payments and is thus more consistent with the objectives of the cash flow statement. Argument #2: The indirect method provides more information than the direct method and is more useful to analysts in estimating future operating cash flows. Which of these arguments support the use of the indirect method for presenting cash flow from operating activities in the cash flow statement? A. Argument #2 only....
Corporations Alpha and Beta have identical assets that generate identical cash flows and as result both...
Corporations Alpha and Beta have identical assets that generate identical cash flows and as result both have market value of V. They differ only in their capital structure.  Alpha has debt equal to​ 20% of the value of the firm​ V, while Beta has debt equal to​ 10% of V. The debt of both corporations is​ risk-free with a​ risk-free interest rate of r. There are no taxes and capital markets are perfect. If Mr Pi owns​ 10% of Corporation​...
expenditures operating assets after the acquisition must be classified as either revenue expenditures (called repairs and...
expenditures operating assets after the acquisition must be classified as either revenue expenditures (called repairs and maintenance expense ) or capitalor capital expenditures. these two terms mean that Two of the other answers are correct Revenue expenditures increase the appropriate asset accounts Capital expenditures benefit one or more future Revenue expenditures benefit only the current.
Assume that the following two companies are in the same industry, have the same EBITDA and...
Assume that the following two companies are in the same industry, have the same EBITDA and similar growth profile. The main difference is the capital expenditure as shown below. Based on the EV/EBIT multiple, which company is more likely to trade at a premium?   Company A: Large capital expenditure to buy new equipment/machinery in recent years, resulting in increased depreciation for the current and future years. Company B: Deferred in capital spending until a future period, resulting in small amount...
Consider two economies are identical in terms of having the same saving rates, population growth rates,...
Consider two economies are identical in terms of having the same saving rates, population growth rates, and efficiency of labor. However, let's assume one economy has a smaller capital stock. Then the steady-state level of output per worker in the economy with the smaller capital stock will be at the same level as in the steady state of the high capital economy. True False
Presented below is financial analysis data for two companies that are identical in every respect except...
Presented below is financial analysis data for two companies that are identical in every respect except that company X uses FIFO method to value its inventory, and company Z uses the LIFO method to evaluate its inventory. Using this data, calculate the following ratios; Return on Sales Inventory turnover Inventory on hand period Current Ratio Which of the two companies is a better investment opportunity and why? Company X Company Z Sales $110,000 $110,000 Cost of Goods Sold $49,500 $60,000...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT