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You work for a pharmaceutical company that has developed a new drug. the patent of the drug will last 17 years. You expect that the drugs profits will $5 million dollars in its first year and that this amount will grow at a rate of 2% per year for the next 17 years. Once the patent expires, other pharmaeutical companies will be able to produce the same drug and competition will likely drive profits to zero. What is the present value of the new drug if the interest rate is 10% per year?
How would your answer change if the value of the cedi was expected to remain unchanged from its current value of 8700 cedi per euro over the course of the three years? Should Cleto construct the plant then?
A firm's dividends have grown over the last several years. 5 years ago the firm paid a dividend of $2. Yesterday it paid a dividend of $7. What was the average annual growth rate of dividends for this firm?
A project costs $10 million at time t=0, then pays cash flows of $1 million per year for 5 years, then the cash flows rise by $1 million per year through year 12. Assuming a WACC of 7%, use the NPV function to find the answer. Write down the equation..
How can you use the cost of common equity found above under (a) to compute the cost of retained earnings? Assuming the company is privately held, would you expect them to rely more heavily on equity or retained earnings? Explain your rationale.
Beryl’s Iced Tea currently rents a bottling machine for $54,000 per year, including a maintenance expenses. Purchase the machine it is currently renting for $160,000. This machine will require $20,000 per year in ongoing maintenance expenses. The mar..
Many companies incur restructuring charges as they attempt to reduce costs. They often label these items in the income statement as “non-recurring” charges to suggest that they are isolated events which are unlikely to occur in future periods. What i..
U.S. Treasuries are never subject to interest rate risk unless we select a maturity equal to our investment horizon. Many practitioners analyze other financial characteristics of a firm, when they forecast betas. When using historical returns to fore..
It has been argued that shareholder wealth maximization is not a realistic normative goal for the firm, given the social responsibility activities that the firm is “expected” to engage in (such as contributing to the arts, education, etc.). Explain w..
A project's expected return is 15%, which represents a 35% return in a booming economy and a 5% return in a stagnant economy. What is the probability of a booming economy occurring if these are the only two economic states?
You open a brokerage account and purchase 200 shares of Google at $443.05 per share. You borrow 40% from your broker to help pay for the purchase. The interest rate on the loan is 8%. One year after purchase, Google’s price is $320. What is your new ..
There is a vigorous global debate about the existence and/or extent of global warming. At the same time investor demand for alternative energy stocks, ETFs and indexes is rising. This Quiz will see you create a custom basket of alternative energy sto..
Suppose that the current one-year rate (one-year spot rate) and expected one-year Tbill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
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