Question

could you please answer now..?

Suppose a firm with 3 business units - J, H & K - has an overall WACC of 12%. Invested capital in each unit earns the following returns:

J = 7%

H = 12%

K = 15%

The firm's stakeholders would best be served by:

Growing unit K while divesting unit H

Growing all units since each has a positive rate of return

Growing unit J while divesting unit K

Growing unit K while divesting unit J

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Question 24 pts

According to the theory of Conservation of Value, an acquisition will create value if:

The cash flow of the merged firm is higher than the sum of the cash flows of the two firms prior to the acquisition

The combined P/E ratio of the resulting company is greater than that of the P/E ratio of the bidder prior to the acquisition

The resulting EPS of the merged firm is higher than that of the acquired firm prior to the acquisition

The revenue of the merged firm is greater than that of the sum of the revenues of the two firms prior to the acquisition

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Question 34 pts

Suppose firm GHI has a return on invested capital of 14% and a cost of capital of 10%. The firm's market value is $28 million and you believe the firm to be fairly valued by the market. GHI's investors have deposited capital in the firm worth approximately:

$14.0 million

$28.0 million

$39.2 million

$20.0 million

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Question 44 pts

Suppose firm RST has a return on invested capital of roughly 22% and desires to grow revenue by 5% for the foreseeable future to meet growth in the market for its services. Assuming a constant asset turnover, in order to fund this growth with internal capital RST will need to retain approximately ______ of its earnings.

0%

5%

110%

23%

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Question 54 pts

Suppose firm PQR has a current return on invested capital of 8% and plans to grow at 15% over the next several years. Which of the following is most true?

PQR's best course of action would be to grow at a less brisk rate

PQR cannot grow at 15% until they increase ROIC to at least 15%

PQR will likely go out of business soon

Near term, PQR will have negative cash flow and thus will have to raise additional capital

Answer 1

Question 14). Answer :- Option B). Growing all units since each has a positive rate of return.

Question 24). Answer :- Option A). The cash flow of the merged firm is higher than the sum of the cash flows of the two firms prior to the acquisition.

Question 34). Answer :- Option C). $ 39.2 Million.

Question 44). Answer :- Option D). 23 %

Explanation :- Retention ratio = Growth rate / Return on invested capital

= 0.05 / 0.22

= 0.23 i.e., 23 % (approx).

Question 54). Answer :- Option D). Near term, PQR will have negative cash flow and thus will have to raise additional capital.