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You are working for Midstream Energy Partners considering a potential pipeline investment. The capital cost of the pipeline is $100 million. If you build the pipeline, you will receive a total of between $200 million to $400 million in royalties (this is the present discounted value of royalties over the life of the pipeline; you can ignore taxes and depreciation in this problem). You may assume that these royalties are distributed uniformly between $200 million to $400 million. Unfortunately, there is a risk of a rupture, and if the pipeline ruptures, your company will be liable for $800 million in damages. The probability of a rupture is low, however, at a level of Prupture = 0.03. If there is a rupture, there is a 25% probability that political pressure from the state in which the rupture occurs and unwelcome attention from the US Congress and federal regulators will cause the total losses to the company to quadruple to $3.2 billion. Note that the damages are not net of royalties. For example, if royalties are $300 million and if the pipeline ruptures causing $800 million in damages, the net payoff to the company would be: $300 million - $100 million (capital cost) - $800 million = -$600 million. Your task is to assess whether Midstream Energy Partners should proceed with this pipeline investment. Midstream has stringent risk controls in place under which the company will not proceed with any investment that would lose $50 million or more in the worst 5% of outcomes. This needs to be done in excel.
There is currently a global recession and the country of Cranmoor is facing mounting difficulties including a substantial balance of trade deficit and a weakening economy. The new Government has promised to be 'financially prudent, ethical, and prepa..
When analyzing investment options, how might the amount and type of risk interact with our expected returns? Is there a formula that can help us quantify this? What is it and does it seem reasonable?
Develop a set of family circumstances where each of term insurance and whole life insurance are the most appropriate type of policy to meet the consumer's needs. Explain why a whole life insurance policy requires a larger premium than a term insuranc..
Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. It would hav..
You have $21,072.44 in a brokerage account, and you plan to deposit an additional $6,000 at the end of every future year until your account totals $210,000. You expect to earn 11% annually on the account. How many years will it take to reach your goa..
Assume the spot exchange rate for the Hungarian forint is HUF221. Also assume the inflation rate in the United States is1.6 percent per year while it is 3.5 percent in Hungary. What is the expected exchange rate 3 years from now? Assume the direct qu..
Harry's Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that if a project's projected NPV is negative, it should be rejected.
An all-equity firm has net income of $28,300, depreciation of $7,500, and taxes of $2,050. What is the firm's operating cash flow?
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). Calculate the project’s Time 0 cash flow, taking into account a..
Mass Inc. is trying to estimate its optimal capital structure. Right now, Mass Inc. has a capital structure that consists of 50 percent debt and 50 percent equity, based on market values. (Its D/S ratio is 1.00) The risk- free rate is 6 percent and t..
Which of the following methods to estimate the cost of capital for equity capital will lead to the highest estimate?
Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 170,000 shares of stock outstanding. What is the break-even EBIT?
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