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A company operates under hard budget constraints and has a WACC of 12%. In the current year it can spend a maximum of Kshs. 80 million on a new investment. The management is considering two alternative projects: Project 1 and Project 2, each of the two projects would run for two years and be sold at a fair price. Both of the projects require Kshs. 80 million initial investments and have present values without flexibility equal to Kshs. 100 million. However project 1 has an annual volatility of 40% and project 2 has an annual volatility of 20%. Both projects allow the management to contract operations by 40% and at any time during the next two years. With project 1 the cash received from contracting would be Kshs. 33 million and with project 2 it would be Kshs. 42 million. The risk free rate is 5%. Using a decision tree analysis (DTA) answer the following questions:
(a) Which project should the company selects, and what other factors should be considered while making the decision?
When and under what conditions would the option to contract be executed with each project?
Explain how the incidents this columnist discusses may be inconsistent with the efficient markets hypothesis.- Is it possible that these incidents might have occurred even though the efficient markets hypothesis is correct?
a firm currently purchases the economic order quantity q of a particular item from its supplier. the supplier is
The required return is 0.95% per month. What is the net present value of this proposed change? Should the company make it?
After twelve (12) years, your business is wildly successful with multiple locations throughout the region. You are now ready to think really big.
Discuss the implications of a firm using debt versus equity for funding purposes. Include the important risk and valuation implications. Illustrate the concept using the example of your study company.
The bond pays a 7 percent coupon, has a YTM of 5 percent, and has 17 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a 5 percent coupon, has a YTM of 7 percent, and also has 17 years to maturity.
Plot two graphs: PW versus i values for both alternatives' cash flows and PW versus _i values for incremental cash flows. Estimate the breakeven ROR values from both graphs, and use this estimate to select one alternative.
Evaluate the risk management techniques used by your employer, including employee benefit and physical location risk management
What break-even resale price in three years would make you indifferent between buying and leasing?
What is the primary competitive forces impacting U.S. steel producers? Do you believe these competitive forces negatively or positively impact the steel industry's competitive structure? Why or why not?
At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $44,000 from the secondary market for $38,900.
Assume large-company stocks returned 11.8 percent on average over the past 75 years. The risk premium on these stocks was 7.9 percent and the inflation rate was 3.2 percent. What was the average nominal risk-free rate of return for those 75 years?
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