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Equity as an Option and NPV: Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,900, and Project B has an NPV of $2,800. As the result of taking Project A, the standard deviation of the return on the firm's assets will increase to 46 percent per year because it is riskier and has lower NPV. If Project B is taken, the standard deviation will fall to 29 percent per year.
a. What is the value of the firm's equity and debt if Project A is undertaken? If Project B is undertaken?
b. Which project would the stockholders prefer? Can you reconcile your answer with the NPV rule?
c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)?
d. What does this problem suggest to you about stockholder incentives? How in the real world bondholders can prevent this?
The common stock of DUC has a beta of 1.65. The market rate of return is 13.2% and the risk-free rate is 4.8%. What is the cost of equity for the firm?
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as your project for financial and performance management you will prepare and submit a consultancy report to the
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The number one semiconductor company in the world, Applied Materials, recently merged with the world's number three semiconductor company, Tokyo Electron. The stock prices of both companies went up significantly after the merger was announced, which ..
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The Poseidon Swim Company produces swim trunks. The average selling price for one of their swim trunks is $84.44. The variable cost per unit is $22.14, Poseidon Swim has average fixed costs per year of $5,685. Determine the degree of operating levera..
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