Concept explainers
a)
To determine: The highest expected payoff in the given projects.
Introduction:
Expected payoff is also known as expected value, which uses the probabilities to compute the definite outcome.
b)
To determine: The highest expected payoff for the equity holder.
Introduction:
Expected payoff is also known as expected value, which uses the probabilities to compute the definite outcome.
c)
To determine: The highest expected payoff for the equity holder.
Introduction:
Expected payoff is also known as expected value, which uses the probabilities to compute the definite outcome.
d)
To determine: The expected agency cost of the firm if the debts are $40 million and $110 million.
Introduction:
Expected payoff is also known as expected value, which uses the probabilities to compute the definite outcome.
Want to see the full answer?
Check out a sample textbook solutionChapter 16 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- A firm wants to select one new research and development project. The following table summarizes six possibilities. Considering expected return and risk, which projects are good candidates? The firm believes it can earn 5.5% on a risk-free investment in government securities (labeled as Project F).arrow_forwardData table (Click on the following icon in order to copy its contents into a spreadsheet.) Cash Flow Today ($ millions) Project A -6 B с 2 25 L Cash Flow in One Year ($ millions) 22 5 - 8 <arrow_forwardou are considering setting up a firm to produce widgets. The cost of the project is $30 today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high, cash flows in t = 1 are $66 and when the demand is low, cash flows in t = 1 are $34. The discount rate is 10%. What is the NPV of the project? Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?arrow_forward
- A firm has two potential investment projects. The project information is summarised in the table below. Project A $670 Project B $700 Expected value of profit Standard deviation of profit Coefficient of variation of profit 175 370 0.26 0.53 Which project has a lower absolute risk level? Which project has a lower relative risk level? Which project would you advise the firm to choose? Explain your answers. ---- --- ---- ..- ---arrow_forwardHome Innovations is evaluating a new product design. The estimated receipts and disbursements associated with the new product are shown below. MARR is 10%/yr. Solve, a. What is the external rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on external rate of return? c. Should Home Innovations pursue this new product?arrow_forwardImagineering, Inc., is considering an investment in CADCAM-compatible design software with the cash flow profile shown in the table below. Imagineering’s MARR is 18%/yr. Solve, a. What is the internal rate of return of this investment? b. What is the decision rule for judging the attractiveness of investments based on internal rate of return? c. Should Imagineering invest?arrow_forward
- Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC or cost of capital Net investment cost (depreciable basis) The salvage value of its equipment No other fixed assets will be acquired for following years The company will require an increase in net working capital at the $10,000 beginning The company will liquidate all working capital at the end of the project -10,000 Units sold (constant through years) 60,000 $30.00 $50,000 $17.00 Average price per unit, Year 1 Fixed operating…arrow_forwardA company is considering a project that has the following cash flows: C0 = -5,000, C1 = +900, C2 = +2,500, C3 = +1,100, and C4 = +2,900 with a risk-adjusted discount rate of 12%. Calculate the Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, and the Payback of this project. If you were the manager of the firm, will you accept or reject the project based on the calculation results above?arrow_forwardBeing Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:Required:a) What should be required rate of return for your investment?b) Keeping the answer of question # 2a in mind, if different investment options are available with different returns in the investment market, for example:i. For investment in Project-A, 6.30% return is offered;ii. For investment in Project-B, 10.95% return is offered, andiii. For investment in Project-C, 5.65% return is offered.In above scenario, explain whether any why these investment options are overvalued or undervalued? Keeping the answer of question # 2a and 2b, what will be your investment decision (justify your answer with reasons)arrow_forward
- OmegaTech is considering project A. The project would require an initial investment of $58,500.00, and then have an expected cash flow of $72,800.00 in 4 years. Project A has an internal rate of return of 9.57 percent. The weighted-average cost of capital for OmegaTech is 6.69 percent. The risk of the project is similar to the average risk of the company. Which one of the following assertions is true? The NPV that Omega Tech would compute for project A is less than or equal to -$11.24. The NPV that Omega Tech would compute for project A is greater than -$11.24 but less than $0.00. The NPV that Omega Tech would compute for project A can not be computed from the information provided The NPV that Omega Tech would compute for project A is equal to greater than $0.00.arrow_forwardBeing Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:Required:a) What should be required rate of return for your investment?arrow_forwardMCS Corporation is considering two possible investments and needs your help in determining which will be the better financial option. Perform the necessary calculations using Microsoft Excel so that maximum precision can be obtained. (Unless indicated otherwise, enter your answers rounded to the nearest whole dollar/input code: 0). Investment Option "North" This potential investment is a little more risky and longer term, so it has a minimum rate of return of 17.60%. This investment would require an initial outlay of cash to purchase a piece of equipment for $131,000, and at the end of the 8- year life of this investment is expected to have a salvage value of $39,300. For each year of this investment, net annual cash inflows are expected to be $29,500. 1. How much is the present value of the purchase of equipment? 2. How much is the present value of the salvage value? 3. How much is the present value of the annual cash inflows? 4. How much is the Net Present Value? 5. What is the value…arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT