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A firm has $100 million in cash on hand and a debt obligation of $100 million due in the next period. With this cash, it can take on one of two projects-A or B-which cost $100 million each. Assume that the firm cannot raise any additional outside funds. If the economy is favorable, project A will pay $120 million and project B will pay $101 million. If the economy is unfavorable, project A will pay $60 million and project B will pay $101 million. Assume that investors are risk neutral, there are no taxes or direct costs of bankruptcy, the riskless interest rate is zero, and the probability of each state is .5.
a. What is the NPV of each project?
b. Which project will equity holders want the managers to take? Why?
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Kerr Corporation purchased a patent on January 1, 2006 for $180,000. The patent had a remaining useful life of ten years at that date. In January of 2007, Kerr successfully defends the patent at a cost of $81,000, extending the patent's life to 12/31..
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A company has an EPS of $2.70, a book value per share of $25.92, and a market/book ratio of 2.2x. What is its P/E ratio? The stock price should be rounded to the nearest cent. Round your answer to two decimal places.
The firm finances with only debt and common equity, so it has no preferred stock. What are the firm's ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.
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