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Maximizing Shareholder Wealth: Doc

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Added on  2020-03-07

Maximizing Shareholder Wealth: Doc

   Added on 2020-03-07

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Question 1 SolutionsPart aCreatingshareholder wealth is a long term strategy which aims to increase a company’s share price through multiple drivers like revenue, cost of capital, investment in working Capitaletc. If done correctly, maximizing a company’s assets can generate sales which can lead to increased values. Hence, this strategy is consistent with the goals of maximizing shareholder wealth. Part b- DifferencesThe difference between the two rates is as follows:Compounding period interest ratetakes into account compounding, whereas the nominal interest rate does not factor compoundingThe compounding period rate is stated as per the compounding period, whereas nominal interest rate can be stated for any period: Annually, semiannually, quarterly, monthly, weekly, daily, etc.The compounding period rate is equal to nominal rate divided by number of compounding periodsQuestion 2 SolutionsSolution aIn order to evaluate this project we need to calculate the Net Present Value (NPV). If NPV>0, then it is a good investmentInformation provided:Nominal rate=12% p.a compounded monthlyt0=-30,000t2= 20,000t5=30,000i=effective interest rate=(1+0.1212)12 -1NPV= -30,000+ 20000∗(1+i)−2+30,000*(1+i)−5
Maximizing Shareholder Wealth: Doc_1
Steps on CalculatoroTo determine effective interest rate, enter nominal rate 12 press Nom %oEnter compounding period 12, press P/YRoPress shift ,EFF% to solve effective interest rateoStore Interest rateoInput the cash flows for (0,2&5) using CF and NoPress the NPV key to solve =$2,264Since NPV> 0, then it is a good investment Solution b1)Investment type- PerpetuityRate of return- 8%Cash flows= $700 from t3PV= 700r∗(1+r)−3Steps on CalculatorInput equation directly as above and solve=$6,946.032)Investment type- Uneven cash flowRate of return- 8%t1=500, t2=1000, t3=1500, t4=2000 t5=2500 t6=3000PV=500*(1+r)−1+1000*(1+r)−2+1500*(1+r)−3+2000*(1+r)−4+2500*(1+r)−5+3000*(1+r)−6
Maximizing Shareholder Wealth: Doc_2
Steps on CalculatoroInput the cash flows for (1,2.3,4,5 & 6) using CF and NoInput 8% and press I/YRoPress the NPV key to solve = $7,573.08Conclusion- I will chose the uneven cash flow investment since it has a greater present value than the perpetuity investmentQuestion 3 SolutionsPart aFuture Value= $50,000Interest rate= 6% p.a compounded monthlyI= 0.06/12= 0.5%=0.005Monthly payment (PMT)= XT= 6050,000= X*¿¿Steps on CalculatoroInput 50,000 and press FV oInput 60 and press N oInput 0.5% and press I/YR oInput 0 and press PV oPress the PMT key to solve for the payment PMT= $716.64
Maximizing Shareholder Wealth: Doc_3

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