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Question: BFF has two mutually exclusive investment opportunities (projects), R and S, each requiring an investment of $50 million, which it plans to fund with debt. Project S pays off $60 million for certain. Project R has an uncertain outcome: it pays $90 million when the economy is good but only $20 million when the economy is poor. Assume that investors are risk neutral, the risk-free rate is zero and that the economy is equally likely to be good or poor. Show any calculations for full credit.
(i) Assuming for simplicity that the debt issued will be one period, pure discount debt, compute the face value of the debt that needs to be issued to raise the required investment amount of $50 million, if (a) Lenders believe that the firm will undertake the project S or (b) Lenders believe that the firm will undertake the project R?
(ii) IF the firms management makes its investments decisions in order to MAXIMIZE the cash flows to equity holders, which project will the firm undertake in practice?
(iii) if lenders are sophisticated, what is the PROMISED PAYMENT that the firm has to offer in return for the $50 million in current debt financing?
Von Burns Technologies Limited (VBTL) has been increasing at a rate of 20 percent a year in recent years. This same growth value is expected to last for another two years.
Capital Gains versus Income. Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $2.40 per share.
An electronic component has design specification limits of 215±25 mhz. Due to variation in the parts that goes into this component, the actual yield varies. A sample of 100 indicated a mean of 220 mhz and standard deviation of 7 mhz.
Currently, the stock price is $32 and the riskfree rate is 10.5% with continuous compounding. 1-yr $30 call price is $6 and 1-yr $30 put price is $2.
You have purchased a call option on Johnson & Johnson common stock. The option has an exercise price of $57.50 and J & J's stock currently trades at $58.93.
Discuss the importance of the Time Value of Money concept, and why cash flow in the future is worth less than the same amount today.
What alternative method of formatting speaking notes might work for speakers who do not wish to use a standard outline?
Which pays the highest dividend? Which does not pay a dividend? Why might a firm not pay a dividend? Why would investors buy the stock of a firm that does not pay a dividend?
An investor has $5,000 invested in a stock which has an estimated beta of 1.2, and another $15,000 invested in stock of the firm for which he works. The risk free rate is 6% and the market risk premium is also 6%.
The new bonds would be issued when the old bonds are called.What will the after-tax annual interest savings for NYW be if the refunding takes place?
The owner's equity is the book value of the firm. In a publicly-held corporation, what are other types of value? How are they calculated?
The next dividend payment by Halestorm, Inc., will be $1.84 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $36 per share, what is the required return? (Do not round interme..
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