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1. Investment Timing Option: Decision-Tree Analysis The Karns Oil Company is deciding whether to drill for oil on a tract of land the company owns. The company estimates 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 cas flows would be $4.2 million a year for 4 years and a 10% chance that they would be $2.2 million a year for 4 years. Assume all cash flows are discounted at 10%. Answer this: a. If the company chooses to drill today, what is the project’s net present value? b. Using decision-tree analysis, does it make sense to wait 2 years before deciding whether to drill? c. Use the Black-Scholes model to estimate the value of the option. Assume that the variance of the project’s rate of return is 1.11% and that the risk-free rate is 6%.
Which of following are sources of cash in a statement of sources and uses? I. Collection of accounts receivables II. Reduction of long-term debt III. Payment of dividends IV. Reduction in the cash account
Causes of Problems for Financial Institutions during the Financial Crisis: Briefly discuss the financial crisis. Determine and discuss the underlying causes of problems experienced by financial institutions during the recent financial crisis. Explain..
In order to replicate the payoff of your two call options at the expiration date that you selected, how many shares of stock should you buy today, and how much should you borrow at the risk-free rate? Calculate and explain.
Consider a 30-year corporate bond paying 9 percent semi-annual coupon. The current yield to maturity is 11 percent. Find the modified duration. Refer to part a. If the interest changes by 25 basis points, what is the exact change in price?
You are scheduled to receive a $480 cash flow in one year, a $780 cash flow in two years, and pay a $380 payment in three years. If interest rates are 9 percent per year, what is the combined present value of these cash flows?
What are the direct quote and indirect quote of the U.S. dollar versus the currency whose issuing country's name starts with the same letter (or closest letter) as your own last name.
Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,200,000. Also, at year-end 2013, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and ..
LaMont works for a company in downtown Chicago. The firm encourages employees to use public transportation (to save the environment) by providing them with transit passes at a cost of $296 per month.
The above table shows the yields to maturity on a number of one-year, zero-coupon securities. What is the credit spread on a one-year, zero-coupon corporate bond with a B rating?
O'Leary Corporation's last dividend paid was $1.00. Dividends are expected to grow at a rate of 17% this year, 15% next year, 10% the following year and 5% thereafter. The required rate of return is 15%. What is the price of the stock 5 years from no..
Hank purchased a $28,000 car two years ago using a 8 percent, 4-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What’s the minimum price Hank would need to receive for his ..
A portfolio consists of 45% of stock A, 35% of stock B, and the remaining of stock C. The expected rate of return of each stock is 28%, 22%, and respectively. The expected return of this portfolio is
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