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You are working for Midstream Energy Partners considering a potential pipeline investment. The capital cost of the pipeline is $100 million. If you build the pipeline, you will receive a total of between $200 million to $400 million in royalties (this is the present discounted value of royalties over the life of the pipeline; you can ignore taxes and depreciation in this problem). You may assume that these royalties are distributed uniformly between $200 million to $400 million. Unfortunately, there is a risk of a rupture, and if the pipeline ruptures, your company will be liable for $800 million in damages. The probability of a rupture is low, however, at a level of Prupture = 0.03. If there is a rupture, there is a 25% probability that political pressure from the state in which the rupture occurs and unwelcome attention from the US Congress and federal regulators will cause the total losses to the company to quadruple to $3.2 billion. Note that the damages are not net of royalties. For example, if royalties are $300 million and if the pipeline ruptures causing $800 million in damages, the net payoff to the company would be: $300 million - $100 million (capital cost) - $800 million = -$600 million. Your task is to assess whether Midstream Energy Partners should proceed with this pipeline investment. Midstream has stringent risk controls in place under which the company will not proceed with any investment that would lose $50 million or more in the worst 5% of outcomes. This needs to be done in excel.
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next seven years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $12.35 per share dividend in year 10..
About 74% of Freddie Mac-owned loans were refinanced in the second quarter of 2005 (USA Today, Lifeline, August 3, 2005), resulting in new mortgages carrying loan amounts at least 5% above the original mortgage balance. Determine if the sample size f..
At what inventory level should a reorder be made? Reorder point= (safety stock + weeks of delivery x weekly usage) - goods in transit. Calculate the total cost of ordering and carrying inventories if the order quantity is 1) 4,000 units, 2) is 4,800..
A mutual fund manager expects her portfolio to earn a rate of return of 8% this year. The beta of her portfolio is .8. Assume rate of return available on risk-free assets is 5% and you expect the rate of return on the market portfolio to be 10%. Calc..
An investment that has a nominal rate of 6% with semi annual payments will have an effective rate that is smaller than 6%. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. If a loan has..
Suppose an employer offers a base wage of $20/hr. for the first 40 hrs. and overtime pay of $30/hr. for any hours beyond 40 per week. The employer allows workers to choose their own hours of work. Compute the average weekly earnings for both employee..
The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): CAPM method, DCF method, and Bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any..
Kellogg Co. (K) recently earned a profit of $2.52 earnings per share and has a P/E ratio of 19.86. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues, what would be the stock price in five years i..
Conduct an internet search for Marketing Consultants. Identify five consulting firms (short paragraph about each). Which would be your first choice if you were tasked with hiring a new consultant? Why? What about their website convinced you they have..
The analyst should be careful not to mechanically add an acquisition premium to the target firm’s estimated value based on the comparable companies’ method if there is evidence that the market values of these “comparable firms” already reflect the ef..
Explain how the following scenarios should be resolved: Murrays can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred’s can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate o..
Write the given essay assignment.- Discuss the challenges that organisations face in aligning their reward and performance appraisal systems.
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