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LOS i: Differentiate among, and evaluate a capital project using, the following valuation models: economic profit (EP), residual income, and claims valuation.
Q1. Charles Waller, a financial analyst for Vandon Pharmaceuticals, is evaluating a potential capital project for the firm. Waller’s favorite capital budgeting approach is the residual income method, which he decides to use for this project. In order to help with his analysis, Waller has compiled financial information concerning the project for 2006.
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Project Income Statement
2006 |
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Revenues |
$56,000 |
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Variable Expenses |
$25,800 |
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Fixed expenses |
$6,000 |
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Depreciation |
$8,000 |
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EBIT |
$16,200 |
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Interest expense |
$5,000 |
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EBT |
$11,200 |
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Taxes (40%) |
$4,480 |
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Net Income |
$6,720 |
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Project Balance Sheet
2005 |
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Cost of Project |
$80,000 |
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Total Assets |
$80,000 |
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Project Financing |
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Debt |
$32,000 |
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Equity |
$48,000 |
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Total Liabilities and Equity |
$80,000 |
Vandon Pharmaceuticals has an after-tax cost of debt of 6.0% and a cost of equity of 12.0%. Vandon’s target capital structure is 60% equity and 40% debt. Based on Waller’s information, what is the residual income for 2006, and what is the proper discount for Waller to use when finding the NPV of the investment?
Residual income Proper discount rate
A) $5,760 9.6%
B) $960 12.0%
C) $960 9.6%
Q2. Firehouse Company is investing in a | 
发表于 2009-3-4 10:10
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