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A Canadian firm is evaluating a project in the United States. This project involves the establishment of a lumber mill in Wisconsin to process Canadian timber. The factory expects to service clients in the construction industry. All cash flow figures are in thousands. Initial Investment. The initial investment is CAD 30,000. The project is over a period of three years. This investment will be depreciated straight line to zero. Operating Results. The firm expects two equally likely scenarios for the first year of operations. Under the favorable scenario, the firm expects to produce and sell 1,100 units of a product. Under the unfavorable scenario, it expects to produce and sell only 700 units. The selling price is expected to be CAD 27; the variable expense is expected to be CAD 11, and fixed costs excluding depreciation are expected to be CAD 3,750. Additional Investment. If the firm encounters the favorable scenario during year 1, it could make an investment of CAD 20,000 to enable it to produce and sell a total of 2,500 units (additional units is 1,400) in the second and third years. The cost parameters remain unchanged with the exception of depreciation. This secondary investment will be depreciated equally in years 2 and 3. If the firm chooses not to make the investment in year 1, the results of year 1 will be repeated during years 2 and 3. Discount Rate and Miscellaneous. Assume a discount rate of 10 percent and zero taxes. a. Estimate the NPV of the project. b. Estimate the NPV of the option to expand
If the intrinsic value of a stock is greater than its market value, then
Weights used in calculating the WACC
When using the shortest life planning horizon (non LCM approach), what issue should you explicitly consider for alternatives whose cash flow profiles extend longer than the shortest life determination of salvage values for truncated cash flows the va..
Calculate and interpret the volume and management variances on the cost side.
A women's apparel chain with a 10 percent debt-to-assets ratio and a times interest earned of 7.0 is concerned about the possibility of losing its independence in a raid. Might this restructuring reduce the company's vulnerability to a takeover? If s..
Middleton's has sales for the year of $311,400, cost of goods sold equal to 74 percent of sales, and an average inventory of $42,800. The profit margin is 6 percent and the tax rate is 34 percent. How many days on average does it take the firm to sel..
He also wants to understand if you think the creation of the financial products exacerbated the credit crisis of 2007 (use at least two examples) and the likely impact on the credibility of the ABS market of the investment firms' activities
Suppose that the current one-year rate (one-year spot rate) and expected one-year Tbill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: Using the unbiased expectations theory, what is the current (long-ter..
Jones Design wishes to estimate the value of its out-standing preferred stock. The preferred issue has an $80 par value and has a dividend rate of 8 percent. Similar-risk preferred stocks are currently earning a 12% annual rate of return. What is the..
A 7.4 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?
How much would you pay today for an investment that provides you $100 each year for the next five years and $1,100 six years from now if the interest rate is 4.6%? Calculate your answer to the nearest penny.
Describe the operating cycle and the cash cycle. What are the differences? What are days sales outstanding (DSO) and why is this calculation important to a business?
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