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SADDA Oil Company has the opportunity to buy a larger pump for its oil field for $10,000. if the firm buys the pump, it will increase cash flows by $720,000 in year one, pumping the field dry. The cash flows for year 2 will be $820,000 less with the new pump than without it, since the field will be dry. In short, the cash flows are (negative numbers in parentheses):
Year 0 1 2
Flow (100,000) 720,000 (820,000)
The firms cost of capital is 12 percent. An IRR was calculated for the project, and it was 15.75 percent. Should SADDA Oil accept this project? Why or why not?
Draw a graph of the NPV of this project at various costs of capital, ranging from zero percent to 8000 percent. Does that graph provide you any useful information in deciding whether to accept the project or not?
Consider a European call option on a non dividend-paying stock. This option is priced using a two-period binomial tree.
You have just struck oil in the middle of your hay field. An oil company has offered to pay you a perpetual annuity of $12,500 per year for rights. What is the value of the offer, assuming a 10% discount rate?
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Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $8.0 milli..
What do you think is the best explanation of how these numbers fit together? - Is anything missing that you can fill in to make better sense of the numbers?
A company has favorable financial leverage when it uses borrowed funds to earn a higher rate of return than the rate of interest paid for the borrowed money.
John Galt is a mutual fund manager at Atlas Asset Management.
An institutional investor speculates the rise of interest rate in twelve months time. It therefore enters today with a local bank a twelve-month forward rate agreement to borrow Eurodollar for six months at 1.96% at contract expiration, with a notion..
Compute the cost of capital for the firm for the following: A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.9 percent. Interest payments are $59.50 and are paid semiannually. The bonds have a current marke..
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You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –29.4 percent, 16.6 percent, 36.2 percent, 3.8 percent, and 22.8 percent. What was the arithmetic average return on the stock over this five-year period? W..
What’s the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semi annually?
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