Reference no: EM131904377
Problem 1: GROWTH OPTION
Martin Development Co. is deciding whether to proceed with Project X. The cost would be $9 million in Year 0. There is a 50% chance that X would be hugely successful and would generate annual after-tax cash flows of $6 million per year during Years 1, 2, and 3. However, there is a 50% chance that X would be less successful and would generate only $1 million per year for the 3 years. If Project X is hugely successful, it would open the door to another investment, Project Y, which would require an outlay of $10 million at the end of Year 2. Project Y would then be sold to another company at a price of $20 million at the end of Year 3. Martin's WACC is 11%.
a. If the company does not consider real options, what is Project X's expected NPV?
b. What is X's expected NPV with the growth option?
c. What is the value of the growth option?
Problem 2: BREAK-EVEN ANALYSIS
A company's fixed operating costs are $ , , its variable costs are $3 00 per unit, and the product's sales price is $4 00. What is the company's break-even point; that is, at what unit sales volume will its income equal its costs?
Problem 3: RISK ANALYSIS
a. Given the following information, calculate the expected value for Firm C's EPS. Data for Firms AandBareasfollows:E EPSA $510, A $361,E EPSB $420,and B $296
Probability
Problem 4: UNLEVERED BETA
Harley Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Harley's beta is currently 1 2, and its tax rate is 40%. Use the Hamada equation to find Harley's unlevered beta, bU.
Problem 5: FINANCIAL LEVERAGE EFFECTS
Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $20 million in invested capital, has $4 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 50% and pays 12% interest on its debt, whereas LL has a 30% debt-to-capital ratio and pays only 10% interest on its debt. Neither firm uses preferred stock in its capital structure.
a. Calculate the return on invested capital (ROIC) for each firm.
b. Calculate the return on equity (ROE) for each firm.
c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 30% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL.
Attachment:- homework problems.xlsx
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