Calculate the expected value of the high- and low-risk

Assignment Help Finance Basics
Reference no: EM131125561

MarCher Industries is considering undertaking a new project with a one-year life with the following expected return scenarios.


Scenario 1 HIGH-RISK PROJECTScenario 2 LOW-RISK PROJECT
Cash flow (boom) $1,500,000 $1,000,000
Cash flow (bust) $400,000 $500,000

The company currently has no debt, but is considering borrowing $870,000 on a short-term basis to help finance its purchase of the project. The company will owe $900,000, including principal and interest, in one year. There is 60% chance a boom will occur, and only 40% chance a bust will occur.
Part 2: Case Analysis

1) Calculate the expected value of the high- and low-risk projects to MarCher Industry's stockholders if the company remains unlevered. Which project would the stockholders prefer?
2) Calculate the expected value of the high- and low-risk projects to MarCher's stockholders and bondholders, assuming the company does borrow money to partially finance the purchase of the project. Which project would the bondholders prefer? Which project would the stockholders prefer?
3) Explain why a conflict exists between the bondholders and the stockholders.

Part 3: Case Paper
Submit a written report that that responds to questions 1-3 (include all calculations as attachments or exhibits). The report should be is 1-2 pages in length, well written with introductory and concluding paragraphs, formatted as follows: double-spaced, one-inch margins, using a 12-point Times New Roman font. References must be appropriately cited as per the APA (6th Edition) citation guidelines. Include a complete bibliography.

Reference no: EM131125561

Explanation monetary policy

Problem 1: Briefly discuss what actions the U.S. Federal Reserve would likely take in pursuing an explanation monetary policy using each of the following three monetary tool

What is the price of the stock today

Joe Inc most recent dividend was $3.00 per share (d0). The dividend is expected to grow at a rate of 6%. The risk free rate is 5% and the return on the market is 9%. If the co

Realistic assessment of expected revenues

Draft budgeted financial statements from 2012 to 2015 under both options that provide a realistic assessment of expected revenues and costs, and explain how you have arrived

Financial planning and agency conflicts

From the scenario, cite your forecasting conclusions that support TFC's decision to expand to the West Coast market. Speculate as to whether or not the agency conflict discu

Acquisition project research of volkswagen

Conduct the research for an acquisition with Fiat and Ford separately. Research how each company will individually benefit from the acquisition. Discuss corporate governance

What is aei''s times-interest-earned (tie) ratio

AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI's times-inter

What is abc cost of external equity

ABC Co. has a current dividend of $1.80. Dividends are expected to grow at a rate of 7% a year into the foreseeable future. What is ABC's cost of external equity if its shar

Estimates regarding medicare

In the year 2000, the Congressional Budget Office offered the following estimates regarding Medicare (the U.S. government program that pays for part of the health costs of ind

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd