Considering two mutually exclusive investments

Assignment Help Financial Management

Reference no: EM13834989

Equity as an Option and NPV: Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,900, and Project B has an NPV of $2,800. As the result of taking Project A, the standard deviation of the return on the firm's assets will increase to 46 percent per year because it is riskier and has lower NPV. If Project B is taken, the standard deviation will fall to 29 percent per year.

a. What is the value of the firm's equity and debt if Project A is undertaken? If Project B is undertaken?

b. Which project would the stockholders prefer? Can you reconcile your answer with the NPV rule?

c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)?

d. What does this problem suggest to you about stockholder incentives? How in the real world bondholders can prevent this?

Reference no: EM13834989

Questions Cloud

Paper on the housing market crash : Write a formal, APA research paper on the housing market crash and where we stand today. The paper should describe the scope and principal features of the field of study (such as Real Estate Broker, Agent, Appraiser, etc.), citing core theories an..

Organization which is the source and the quotations : organization which is the source and the quotations

Student-centered through the foundations of differentiation : student-centered through the foundations of differentiation

Breaking up company and selling the parts create value : A multi-product company's breakup value equals the cash one could realize by splitting the company into two or more independent firms and disposing of each separately. A company becomes a candidate for a takeover when its market value falls below its..

Considering two mutually exclusive investments : Equity as an Option and NPV: Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,900, and Project B has an NPV of $2,800.

Describe the challenging aspects of the scenario : Describe the challenging aspects of the scenario. Identify and discuss relevant principles in the CAMFT Code of Ethics. Apply a decision-making model to the case, explaining the best course of action

What is the market value of the firms equity and debt : Sunburn Sunscreen has a zero coupon bond issue outstanding with a $21,000 face value that matures in one year. The current market value of the firm's assets is $21,000. The standard deviation of the return on the firm's assets is 34 percent per year,..

Which property of the matrix multiplication is demonstrated : Define a matrix A = [12 16 4;23 1 21;9 10 1] and B = [2 7 14;3 11 2;-9 10 12]. Perform matrix multiplication A*B, and call this D. Find the transpose of A, and call this E. Find the transpose of B, and call this F. Find the transpose of D, and call t..

User Account

All Pages