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Your company is considering whether to develop a new digital video camera. If you spend $2 million now and $2 million next year, then in 2 years from now you will have a prototype based on new technology. You will then learn whether its performance is superior to existing technology, about the same, or inferior. The probability of superior technology is 25%, the probability that performance is about the same is 45%, and the probability of inferior performance is 30%. You can then decide whether to abandon the project (in which case no further cash flows occur), or to invest $10 million in a production facility to manufacture a high-quality camera, or to invest $7 million in a production facility to manufacture a lowquality camera. If you go ahead and invest, you will then receive equal cash flows from producing the camera at the end of each of the next 4 years. If the technology is superior, the cash flow per year from producing the high-end camera would be $6 million, and for the low-end camera it would be $4 million. If the technology is about the same as existing technology, the cash flow per year from producing the high-end camera would be $4 million, and for the low-end camera it would be $3.5 million. If the technology is inferior, the cash flow per year from producing the high-end camera would be $1.5 million, and for the low-end camera it would be $2 million. The discount rate is 12%. Should you develop the new camera or not? Draw a decision tree and show your work associated with the recommendation you make.
Studies have shown that indexed funds can produce higher returns than managed funds; this is evidence in support of:
Suppose that put options on a stock with strike prices $45 and $55 cost $2 and $8, respectively. Use these options to create a bear spread. At what stock price at maturity will you break even? In other words, at what stock price, will you make $0 pro..
Fly Away, Inc., has balance sheet equity of $5.3 million. At the same time, the income statement shows net income of $763,200. The company paid dividends of $431,208 and has 120,000 shares of stock outstanding. If the benchmark PE ratio is 17, what i..
Complete the balance sheet and sales information using the following financial data: totals assets turnover: 1.5x days sales outstanding: 41 days inventory turnover ratio: 7x fixed asset turnover:3.5x current ratio:1.7x gross profit margin on sales=2..
A company's stock has a beta of 1.15. The risk free rate is 4.72%, and the expected rate on stocks is 10%. If a share of this common stock has just paid a quarterly dividend of $.35, and the long-run growth rate is 5 percent, value this stock.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 18 percent, –3 percent, 16 percent, 11 percent, and 10 percent. hat was the arithmetic average return on Crash-n-Burn’s stock over this five-year period?..
Abacus, Inc. forms a corporation, Sirius, Inc., by transferring 18 percent of Abacus's stock to it for 100 percent of the stock in Sirius. Sirius, Inc. acquires 90 percent of the stock of Tyrol, Inc. for its stock in Abacus, whereupon Sirius is merge..
Your older brother turned 35 today, and he is planning to save $30,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to r..
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi annually.
How do you think that most businesses (such as Dell computers -- starting in a college dorm room to ultimately becoming a global company traded in the capital markets.) are first financed as a start-up company?
Identifying and applying useful data and information and demonstrate logic to interpret data - Recognizing and discuss inferences and faulty logic.
Calculate the delta of an at-the-money six-month European call option on a non-dividend-paying stock when the risk-free interest rate is 10% per annum and the stock price volatility is 25% per annum.
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