FIN 365 Business Finance. Review Exam 4 Larry Schrenk, Instructor. Questions 1-5. How should you incorporate sunk costs in evaluating a project? (5 points ) Are interest payments on debt included in the cash flows of a project? Explain briefly. (5 points )
Review Exam 4
Larry Schrenk, Instructor
i) Correctly evaluate all projects,
ii) Accept bad projects,
iii) Reject good projects, or
iv) Accept bad projects and reject good projects?
Explain briefly. (5 points)
New Share Price = P/E Ratio x Earnings per Share
= P/E Ratio x (Net Income/Shares)
Note: P/E Ratio and Net Income do not change → Only shares change.
P/E Ratio = Price per Share/Earnings per Share
= 40/(3,700,000/1,285,000) = 40/2.88 = 13.89
Net Income = 3,700,000
New Shares = .90 x 1,285,000 = 1,156,500
New Share Price = 13.89 x (3,700,000/1,156,500) = $44.44