Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,200 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects:    Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,200 $ 3,400 Good .50 4,600 4,900    a. What is the expected value of the company if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations.) b. What is the expected value of the company’s equity if the low-volatility project is undertaken? What is it if the high-volatility project is undertaken? (Do not round intermediate calculations.) c. Which project would the company’s stockholders prefer if they are risk neutral? d. Suppose bondholders are fully aware that stockholders might choose to maximize equity value rather than total company value and opt for the high-volatility project. To minimize this agency cost, the company's bondholders decide to use a bond covenant to stipulate that the bondholders can demand a higher payment if the company chooses to take on the high-volatility project. What payment to bondholders would make stockholders indifferent between the two projects? (Do not round intermediate calculations.)

Halloween, Incorporated, is considering a new product launch. The firm expects to have an annual operating cash flow of $9.2 million for the next 8 years. The discount rate for this project is 13 percent for new product launches. The initial investment is $39.2 million. Assume that the project has no salvage value at the end of its economic life.    a. What is the NPV of the new product? (Do not round intermediate calculations and After the first year, the project can be dismantled and sold for $26.2 million. If the estimates of remaining cash flows are revised based on the first year’s experience, at what level of expected cash flows does it make sense to abandon the project?

Lible, Incorporated, is considering a project that will result in initial aftertax cash savings of $1.74 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. The firm has a target debt-equity ratio of .75, a cost of equity of 11.4 percent, and an aftertax cost of debt of 4.2 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. What is the maximum initial cost the company would be willing to pay for the project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.)

Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A and project B, assuming that both projects have a weighted average cost of capital of 12%?   Cash Flow     Project A   Project B   Year 0: –$15,000 Year 0: –$40,000 Year 1: 9,000 Year 1: 8,000 Year 2: 15,000 Year 2: 15,000 Year 3: 14,000 Year 3: 14,000     Year 4: 13,000     Year 5: 12,000     Year 6: 11,000   $13,512   $11,923   $15,897   $12,718   $10,333     Newtown Corp. is considering a five-year project that has a weighted average cost of capital of…

Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,300, has a five-year life, and has no residual value after five years. The company's cost of capital is 10.41%. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV across the three scenarios. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 1 2 3 4 5 Pessimistic $6,720 7,180 8,680 7,770 5.800 Expected cash inflows Most likely $9,240 10,150 11,790 10,740 7.840 Optimistic $11,830 13,260 15,800 12,790 8.780

Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Lobster Seafood Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to generate an annual after-tax cost reduction of $105,000 forever. The corporation has a total value of $65 million and has outstanding debt of $45 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent? $244,843 $150,409 $480,584 $67,715

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