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We are examining a new project. We expect to sell 7,000 units per year at $38 net cash flow per unit for the next 10 years. The relevant discount rate is 16%, and the initial investment required is $1,040,000. 1) What is the base-case NPV? 2) After the first year, the project can be dismantled and sold for $820,000. If expected sales are revised based on the first year’s performance, when would it make sense to abandon the investment? In other words, at what level of expected sales would it make sense to abandon the project? 3) Explain how the $820,000 abandonment value can be viewed as the opportunity cost of keeping the project in one year. 4) Suppose you think it is likely that expected sales will be revised upward to 9,500 units if the first year is a success and revised downward to 3,800 units if the first year is not a success. Success and failure and equally likely. What is the NPV of the project? (Consider the possibility of abandonment in answering.) What is the value of the option to abandon? please show work
A call option is currently selling for $5.40. It has a strike price of $80 and seven months to maturity. The current stock price is $82, and the risk-free rate is 2.9 percent. The stock will pay a dividend of $1.45 in two months. What is the price of..
You are considering a new product launch. The project will cost $925,000, have a six-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected to be $1,800,000; variable cost per unit will be 60% of sales; and f..
All of the following are methods of evaluating the risk of a project except which one?
Compute the weighted-average cost of capital for a firm with the following sources of funds and corresponding required rates of return: $5 million common stock at 16%, $500,000 preferred stock at 10%, and $3 million debt at 9%. All amounts are listed..
What is the effect of stock (not cash) dividends and stock splits on the market price of common stock? Why do corporations declare stock splits and stock dividends?
Atlantis Fisheries issues zero coupon bonds on the market at a price of $514 per bond. Each bond has a face value of $1,000 payable at maturity in 14 years. It is callable in 7 years at a call price of $640. Using semi annual compounding, what is the..
Judy Garland is planning to open a stall at the local mall, paying $2500 rent, in advance each month. She will buy $25,000 in costume jewelry as the initial inventory, and buy the display cases for $4000. Assume that all the cash flows occur at the e..
A stock currently has a price of 1300. The price of a three month 1320-strike put is 81.41. The annual interest rate is 4% compounded continuously. Bob buys this put, and Rick enters into a long forward contract. In three months, Bob and Rick have th..
What are the theories (including strengths and weaknesses) about the yield curve and how each explains the yield curves shape?
Define the competitive advantage that the strategic initiative (capturing more of the PC market share through launch of larger more functionable iPads) provides Apple Inc.
You own a portfolio that has a total value of 103,000 dollars. The portfolio has 5,000 shares of stock A, which is priced at 8.3 dollars per share and has an expected return of 8.25 percent. What is the risk premium for your portfolio?
A manager is holding a $1.4 million bond portfolio with a modified duration of 7 years. She would like to hedge the risk of the portfolio by short-selling Treasury bonds. The modified duration of T-bonds is 8 years. How many dollars' worth of T-bonds..
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