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An oil company has paid $100,000 for the right to pump oil on a plot of land during the next three years. A well has already been sunk and all other necessary facilities are in place. The land has known reserves of 60,000 barrels. The company wishes to know the market value of this operation. The interest rate8% and the marginal cost of pumping is $8 per barrel. Both these costs are expected to remain unchanged over the three-year period. The current price of oil is $10 per barrel. Company economists have estimated the following:i) Oil will increase in price by 10% with a probability of 40%, or decrease in price by 12% with a probability of 60% during each of the next three yearsii) The cost of storing oil in above-ground tanks is $0.50 per yeariii) The company can pump a maximum of 20,000 barrels per year at the site. iv) The site may be shut down for a year and then reopended at a cost of $2,000.Determine the market value of the operation ignoring taxes. Assume that all cash flows occur at the end of each year. (Hint: Chart all possible sequences of oil prices, and calculate the optimal production decisions and payoffs associated with each sequence.)
Degree of operating leverage Grey Products has fixed operating expenses of $380,000, variable operating expenses of $16 per unit, and a selling price of $63.50 per unit.
Which of the following statments concerning the change in working capital is most accurate?
A share of stock currently pays a dividend of $5. The dividend is expected to grow at a 20% yearly for next ten years, then it will grow at a 15% rate for 10 more years
To raise the $10,000,000 Stonehedge will need to issue new securities at a weighted average flotation cost of 10%. What is the NPV of the expansion?
They also have $18,500 in business equipment they own, and owe $1,600 in loans for new equipment. According to this list, what are the totals of assets and liabilities for the business?
Discuss how interest based bargaining is different from other techniques.
Interest rates are 0.5% per month. Determine the net profit or loss if the index price at expiration is $830 (in 6 months).
The company's stock is selling for $30 per share. The company had total earnings of $6,900,000 during the year. With 2,300,000 shares outstanding, earnings per share were $3. The firm has a P/E ratio of 10.
Suppose that the futures price of a commodity is 500 cents, the strike price of a futures option is 550 cents, the risk-free rate of interest is 3%, the volatility of the futures price is 20%, and the time to maturity of the option is 9 months.
What is meant by saying debt is tax-favored? What is the benefit to the firm? What are the risks?
The truck will have no effect on revenues, but it is expected to save the firm $23,800 per year in before-tax operating costs, mainly labor. The firms marginal tax rate is 34 percent. What will the cash flows for this project be?
What is the maximum amount that a firm should consider paying for a project that will return $12,000 annually for 6 years if the opportunity cost is 12%?
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