Tangshan Mining Is Considering the Acquisition of Zhengsen Mining at a Cash

question 20

Multiple Choice

Tangshan Mining is considering the acquisition of Zhengsen Mining at a cash price of $6,000,000. The primary motivation for Tangshan's purchase of Zhengsen is for a special piece of drilling equipment that it believes will generate after-tax cash flows if $2,000,000 per year during the next 5 years. Zhengsen Mining has liabilities of $9,000,000 and Tangshan estimates that it can sell the remaining assets $6,500,000. Tangshan will use a 15 percent cost of capital for evaluating the acquisition. Based on this information, what is the net value of the special drilling equipment?

• A) $1,795,690
• B) $1,500,000
• C) ($1,795,690)
• D) ($1,500,000)

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Definitions:

Alpha/Beta

Measures in finance; Alpha represents the strategy's returns above the benchmark, whereas Beta indicates the volatility relative to the market.

Sharpe Measure

A measure of the excess return (or risk premium) per unit of risk in an investment asset or a trading strategy, calculated as the difference between the asset's returns and the risk-free rate, divided by the asset's standard deviation.

Forecasting Ability

The capability to predict future trends, prices, or outcomes based on historical data, trends, and analysis.

Tracking Error

The difference between the return on a managed portfolio and that of a benchmark portfolio against which the manager is evaluated.