A venture capitalist, willing to invest $1,000,000, hasthree investments to choose from. The firstinvestment, a software company, has a 7% chance ofreturning $4,000,000 profit, a 23% chance of returning$1,500,000 profit, and a 70% chance of losing themillion dollars. The second company, a hardwarecompany, has a 8% chance of returning $4,000,000profit, a 26% chance of returning $1,500,000 profit,and a 66% chance of losing the million dollars. Thethird company, a biotech firm, has a 8% chance ofreturning $8,000,000 profit, a 21% of no profit or loss,and a 71% chance of losing the million dollars.Order the expected values from smallest to largest.first, second, thirdsecond, third, firstO third, second, firstOsecond, first, thirdthird, first, secondfirst, third, second

Expected Value: It is estimated by adding all the outcomes which are weighted by their…

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Order the expected values from smallest to largest.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose Dean has $500 and there are two companies he could invest X dollars in: Dog Gone Salon, which has a payoff of 2X with 50% probability and $0 with 50% probability and Pretty Kitty Grooming, which has a payoff of 4X with 25% probability and $0 with 75% probability. Which of the following is true? Select one: O a. Investing in Pretty Kitty Grooming offers a higher expected payoff. O b. Even though the expected payoff is the same for both investments, investing in Dog Gone Salon involves less risk. O . Even though the expected payoff is the same for both investments, investing in Pretty Kitty Grooming involves less risk. O d. It doesn't matter how distributes his $500 between the two investments, the expected payoff and the standard deviation will always be the same.
Suppose you are the financial manager of a company, and there are three potential projects for investment. The risk free rate is 2%. The market risk premium is 6%. The beta of the company is 0.6. You need to invest $100 today for Project A, and project A is expected to provide a cash flow of $6 a share forever. The beta for this project is 0.75. You need to invest $105 today for Project B, and project B is expected pay $3.5 next year. Thereafter, payment growth is expected to be 3% a year forever. The beta for this project is 0.7. You need to invest $175 today for project C, and project C is expected to pay $1.25, $3.80, and $3.00 over the next three years, respectively. Starting in year 4 and thereafter, dividend growth is expected to be 3.5% a year forever. The beta for this project is 0.5. (a1) What's the expected return of the market portfolio? And what's the beta for this market portfolio? (a2) What is the discount rate for each project?(a3) which project(s) will you invest? And…
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin’s equity beta is 0.85, the risk-free rate is 4%, and the market risk premium is 5%. If your firm’s project is all equity financed, estimate its cost of capital.
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.83, the risk-free rate is 4.2%, and the market risk premium is 4.7%. If your firm's project is all-equity financed, estimate its cost of capital. The cost of capital is %. (Round to one decimal place.)
Suppose Dean has $500 and there are two companies he could invest X dollars in: Dog Gone Salon, which has a payoff of 2X with 50% probability and $0 with 50% probability and Pretty Kitty Grooming, which has a payoff of 4X with 25% probability and $0 with 75% probability. Dean's expected payoff from investing in Dog Gone Salon only is: Select one: O a. $1,000. O b. $0. O'e $500.. O d. $1,500.
A firm's financial managers are evaluating two potential investments with a cost of $10,000 each. They forecast returns of $3,000 per year for 5 years for Investment A and $4,000 per year for 5 years for Investment B. The returns are more uncertain for B than for A. Which of the following is true? Investment A is better than B according to shareholder wealth maximization criterion. Investment B is better than A according to shareholder wealth maximization criterion. Investment A is better than B according to the profit maximization criterion. Investment B is better than A according to the profit maximization criterion.
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin's equity beta is 0.82, the risk-free rate is 4%, and the market risk premium is 5%. If your firm's project is all equity financed, estimate its cost of capital. The estimated cost of capital is% (Round to two decimal places.)
You are considering investing in a start up company. The founder asked you for $210,000 today and you expect to get $1,070,000 in 11 years. Given the riskiness of the investment opportunity, your cost of capital is 28%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. What is the NPV of the investment opportunity? The NPV of the investment is $ (Round to the nearest dollar.) Should you undertake the investment opportunity? Since the NPV is the deal! (Select from the drop-down menus.) Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is%. (Round to two decimal places.) The maximum deviation allowable in the cost of capital is%. (Round to two decimal places.) www you should
You are considering investing in a start up company. The founder asked you for $260,000 today and you expect to get $1,040,000 in 13 years. Given the riskiness of the investment opportunity, your cost of capital is 21%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. What is the NPV of the investment opportunity? The NPV of the investment is $ (Round to the nearest dollar.) Should you undertake the investment opportunity? Since the NPV is the deal! (Select from the drop-down menus.) Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is%. (Round to two decimal places.) The maximum deviation allowable in the cost of capital is %. (Round to two decimal places.) you should
You have $5000 to invest for 1 year. Fund A has an estimated 4% annual return, and Fund B has an estimated 10% annual return. Fund A is more stable, and preferred among investors with low risk tolerance. Fund B is less stable, but has larger returns. Answer the following questions about this investment opportunity. 1. Suppose you have a low risk-tolerance, and you invest everything in Fund A. How much do you expect to make on your investment?Round to the nearest cent. 2. Suppose you have a medium risk-tolerance, and you want an annual return of $355. You decide to invest part in Fund A and the rest in Fund B. How much do you need to invest in Fund A?
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $24 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $5.2 million. Investors are willing to provide you with $5.2 million in initial capital in exchange for 30% of the unlevered equity in the firm. a. What is the total market value of the firm without leverage? b. Suppose you borrow $0.6 million. According to MM, what fraction of the firm's equity will you need to sell to raise the additional $4.6 million you need? c. What is the value of your share of the firm's equity in cases (a) and (b)?
Consider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the above

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