17. Suppose Intel is considering building a new chip-making factory. Would Intelcompare the expected rate of return on the factory to the bond marketinterest rate when deciding whether to build the factory? If Intel needs toborrow money in the bond market, how might the bond interest rate affectIntel's decision whether to build the factory? If Intel has enough of its ownfunds to finance the new factory without borrowing, would the bond interestrate affect their decision whether to build the factory?

A capital project should be accepted only if its expected return is more than the cost of capital.

Answered: Suppose Intel is considering building a…

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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As a part of their expansion plan, NYA Company that is producing notebooks is planning to buy a new production line to produce its own ink. Ordinarily, they would resort to their bank to take long-term financing to fund the purchase. However, the company is already highly leveraged, and the bank refused to give them additional funding. What is their best option now if they insist on buying the new production line? Would this type of finance be short or long term? What kind of advantages does the company have if it resorts to this type of financing?
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(Related to Checkpoint 8.1) (Expected rate of return) James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund's performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. a. The expected rate of return from this investment opportunity is %. (Round to two decimal places) Data Table State of Economy Rapid expansion and recovery Modest growth Continued recession Falls into…
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An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $506,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows: Fund A Year 1 Year 2 Year 3 Year 4 Year 5 Fund B Year 1 Year 2 Year 3 Year 4 Year 5 Contributed Capital $ 202,400,000 303,600,000 Contributed Capital $ 303,600,000 202,400,000 Required A Fund A Fund B Capital Returned $0 0 0 Required B 101,200,000…
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(a) A firm must decide between investing in two alternative risky projects, each requiring the same initial investment. Project A has an equal probability of four possible payoffs: £80m, £100m, £120m or £140m. Project B has a 50:50 chance of a payoff of £90m or £126m. Assuming that the firm's managers are risk averse, which project would they prefer, and why? (b) If a firm wishes to obtain financing for an investment, under what conditions will it be desirable for the firm to pay a cost C for certification of its good quality? Take care to define any notation and model you use.

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