Self-Test Problems

(Solutions in Appendix)

  1. Learning Goal 3

    ST18–1 Cash acquisition decision  Luxe Foods is contemplating acquisition of Valley Canning Company for a cash price of $180,000. Luxe currently has high financial leverage and therefore has a cost of capital of 14%. As a result of acquiring Valley Canning, which is financed entirely with equity, the firm expects its financial leverage to be reduced and its cost of capital to drop to 11%. The acquisition of Valley Canning is expected to increase Luxe’s cash inflows by $20,000 per year for the first 3 years and by $30,000 per year for the following 12 years.

    1. Determine whether the proposed ...

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