Corporate Investment Decision Making
1. a. Briefly explain why from the shareholders’ perspective it is desirable for corporations to maximize NPV.
b. What assumptions are necessary for this argument to be correct?
2. Consider a one-year world with perfect capital markets in which the interest rate is 10 percent. Suppose a firm has $12 million in cash. The firm invests $7 million today, and $5 million is paid to shareholders. The NPV of the firm’s investment is $3 million. All shareholders are identical.
a. How much cash will the firm receive next year from its investment?
b. Suppose shareholders plan to spend $10 million today.
(i) How can they do this?
(ii) How much money will they have available to spend next year if they follow your plan?