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Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.
Which of the following statements is FALSE?
A. The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital.
B. The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital.
C. Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions.
D. There are situations in which multiple IRRs exist.
The WACC is the required return on the firm’s capital budgeting projects of average risk. Financial Risk is the additional risk resulting from the use of debt. Default Risk is the likelihood that the company will go bankrupt prior to the bond’s matur..
Aloha Tropical, Inc, has in its capital structure the following composition: 40% debt and 60% equity. The estimated cost of debt after tax is 7% and the estimated cost of capital is 15%. Calculate the weighted average cost of capital (WACC).
For the bond problem, assume interest payments are on an annual basis. Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute t..
Union local school district has a bond outstanding with a coupon rate of 3.7% paid semiannually and 16 years to maturity. The yield to maturity on this bond is 3.9%, and the bond has a par value of $5000. What is the price of the bond?
Underestimated Inc.’s common shares currently sell for $36 each. The firm’s management believes that its shares should really sell for $57 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase ..
Technologies Inc is using modified internal rate of return (MIRR) when evaluating projects. The company is able to reinvest cash flows received from the project at an annual rate of 9.70%. The initial outlay for the project is $496,600. Find the MIRR..
Given the following information concerning a convertible bond: What is the current yield of this bond? What is the value of the bond based on the market price of the common stock? What is the value of the common stock based on the market price of the..
How do warrants and convertible bonds differ from call options? Why would a corporation issue warrants or convertible bonds?
What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1?
An investor buys a European put on a share for $3. The stock price is currently $42 and the strike price is $40. When does the investor make a profit?
Assume that the returns from an asset are normally distributed. The average annual return for this asset over a specific period was 17 percent and the standard deviation of those returns in this period was 43.68 percent. What about triple in value?
What are some differences between "free cash flow" and "profits"?
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