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A firm is considering a new project that has a cost of $1,000. Suppose, the CFO asked you to set up the decision tree to show its three most likely scenarios. The best case scenario happens with probability of 0.2, and produces three cash flows of $800 at t=1,2,3. With probability of 0.6 the base case scenario produces cash flows of $520 for the next three years. With the remaining probability the worst case scenario leads to negative cash flow of -$200 at time 1, after which the firm could arrange with its work force and suppliers to cease operations at the end of Year 1. Assume that WACC is 7%.
a. What is the expected NPV of the new project?
b. Is the project risky given that the average project of that firm has a coefficient of variation of 1.7? Prove by finding CV of the project.
Now, Dr. Pennyworth has a chance to purchase one of two professional cricket clubs, the Miami Manatees or the Jacksonville Gemini. At the beginning of last year, the Manatees were purchased for $100 million, provided $10 million in profits, and are c..
An investor purchases one municipal bond and one corporate bond that pay rates of return of 10% and 11.5%, respectively. If the investor is in the 20% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectiv..
subsidiary x sells 10000 units to subsidiary y annually. the marginal income tax rate for subsidiary x is 30 and the
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2 percent. What is the pretax required return o..
The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will increase by 12 percent a year for the following two years before growing at 4 percent indefinitely thereafter. If the required rate of return is 10 percent, what is the..
Variable Cost per unit is $175, the sales price would be set at twice the VC/unit and fixed costs are $500,000. The target operating income (EBIT) is $350,000. What sales volume would be required in order to meet the minimum profit goal? (Hint: use b..
If the stock market is weak form efficient, then an investor can NOT earn excess profits by:
In the following ordinary annuity, the interest is compounded with each payment, and the payment is made at the end of the compounding period. An individual retirement account, or IRA, earns tax-deferred interest and allows the owner to invest up to ..
Does Medicaid's medically needy category make sense to you? Why or why not? For example, is it a good idea to discount medical expenses so high-need individuals can access healthcare through Medicaid?
Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $455,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherw..
Absalom Motors's 9% coupon rate, semiannual payment, $1,000 par value bonds that mature in 15 years are callable 9 years from now at a price of $1,100. The bonds sell at a price of $1,520, and the yield curve is flat.
In the previous year, a firm had $150 million in sales, $100 million in operating expenses, and $20 million in net income. As of the end of the year the firm had $200 million in total assets and $80 million in total shareholders' equity. Calculate th..
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