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The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project would cost $8 million today. Karns estimates that once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each of the next 4 years. Although the company is fairly confident about its cash flow forecast, in 2 years it will have more information about the local geology and about the price of oil. Karns estimates that if it waits 2 years then the project would cost $9 million. Moreover, if it waits 2 years, then there is a 90% chance that the net cash flows would be $4.2 million a year for 4 years, and there is a 10% chance that they would be $2.2 million a year for 4 years. Assume that all cash flows are discounted at 10%. Use the Black-Scholes model to estimate the value of the option. Assume the variance of the project's rate of return is 1.11% and that the risk-free rate is 6%. Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
What would be the cost of existing and new preferred stock respectively? If preferred stock is selling for $27.00 a share. The firm nets $25.60 after issuance costs. And the stock pays an annual dividend of $3.00 a share.
Please draw the efficient frontiers and discuss the relevant implication under the following assumptions: (a) Risk free assets are possible and short sale is not allowed; (b) Risk free assets are impossible and short sale is not allowed. Please discu..
Create a comparison chart for these 10 ratios for 2 years for each company. Explain how you calculated each ratio. Explain what each ratio should mean to management.
Larry Smart has $10,000 which he can invest today. In addition to this amount, he can also invest $2,500 per year for thirty years (beginning one year from now) at which time he will retire. He plans on living for twenty years after he retires. If in..
To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum?
You are paying a series of five constant-dollar (or real-dollar) uniform payments of $1944.66 beginning at the end of first year. Assume that the general inflation rate is 25.83% and the market interest rate is 25.83% during this inflationary period.
Explain how pricing in the equity market can influence a firm's (capital expenditures, such as plant and equipment, or expansion)) investment decisions. Explain how pricing in the bond market can influence a firm's capital structure (proportions of s..
The Chinese Yuan was reset from 8.28 Yuan? $ to 8.11 Yuan / $ in July 2005. If Cnooc (Chinese Corporation) had agreed to acquire Uncoal (US corporation) before July for a pre-set price in dollars,
Why is revenue management an important tool for hospitality managers? Why is RevPAR(Revenue Per Available Room) a better measure of a hotel's effectiveness than RevPOR (Revenue Per Occupied Room)?
XKL Co. plans a new project that will generate $ 187,000 of continuous cash flow each year for 8 years and additionally $108,000 at the end of the project. If the continuously compunded rate of interest is 4%, estimate the present value of the cash f..
It is now the beginning of a year. Jared is considering the purchase of a 7.5 percent (coupon rate), 15-year bond that is presently priced to yield 11 percent (i.e. market interest rate is 11 percent). Based on extensive analysis of market interest r..
Merton Enterprises has bonds on the market making annual payments, with 12 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on Merton’s bonds?
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