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(Answered) Evaluating Investment Opportunities


1. Times are rough for Auger Biotech. Having raised $85 million in an initial public offering of its stock early in the year, the company is poised to launch its product. If Auger engages in a promotional campaign costing $60 million this year, its annual after-tax cash flow over the next five years will be only $700,000. If it does not undertake the campaign, it expects its after-tax cash flow to be minus $18 million annually for the same period. Assuming the company has decided to stay in its chosen buisness, is this campaign worthwhile when the discount rate is 10 percent? Why or why not? 2. Your company's weighted-average cost of capital is 11 percent. It is planning to undertake a project with an internal rate of return of 14%, but you believe this project is not a wise investment. what logical arguments would you use to convince your boss to forego the project despite its high rate of return? is it possible that making investments with returns higher than the firm's cost of capital will destroy value? if so,how? 3. in the acquisition described in the previous question, Newscorp paid $60 per share for the outstanding shares of Dow Jones and Company. Immediately prior to the Newscorp bid, the shares of Dow Jones traded at $33 per share. what value did Newscorp place on the control of Dwo Jones and company? 4. Flatbush Shipyards is a no-growth company expected to pay a $12-per-share annual dividend into the distant future. its cost of equity capital is 15 percent. the new president abhors the no-growth image and proposes to halve next years dividend to $6 per share and use the savings to acquire another firm. the president maintains that this strategy will boost sales, earnings, and assets. Moreover, he is confident that after acquisition, dividends in year 2 and beyond can be increased to $12.75 per share. a. do you agree that the acquisition will likely increase sales, earnings, and assetd? b. Estimate the per share value of Flatbush's stock immediately prior to the presidents proposal. c. estimate the per share value immediately after the proposal has been announced. d. as an owner of Flatbush, would you support the presidents proposal?Why or why not?
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Evaluating Investment Opportunities

 


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