You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25 per share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of the next year, it will buy the shares back from you for $25 per share if you desire. Suppose the current one-year risk-free rate is 6.18%, the volatility of JCH stock is 30%, and JCH does not pay dividends.
- a. Is this offer worth more than $25 million? Explain.
- b. What is the value of the offer?
Want to see the full answer?
Check out a sample textbook solutionChapter 22 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Additional Business Textbook Solutions
Corporate Finance
Foundations Of Finance
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Foundations of Finance (9th Edition) (Pearson Series in Finance)
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
- You are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP. The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments. Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against…arrow_forwardMitchell Investments has offered you the following investment opportunity: $7,000 at the end of each year for the first 7 years, plus $5,000 at the end of each year from years 8 through 13, plus $3,000 at the end of each year from years 14 through 25. Use Table II and Table IV or a financial calculator to answer the questions. Round your answers to the nearest dollar. How much would you be willing to pay for this investment if you required a 8 percent rate of return?$ If the payments were received at the beginning of each year, what would you be willing to pay for this investment?$arrow_forwardUse the following information for the next two questions: Please answer the two questions. Thank you <3 You finished your studies, passed the CPA board exams, and now an accountant. A real estate company offered to sell you a house with a cash selling price of P14,000,000 under an in-house financing agreement. The amortization will be on a monthly basis over a period of 25 years and the effective interest rate is 12%. You are wondering if you can afford to purchase the house. You estimated your monthly expenditure to be P36,600, which included a risk adjustment allowance. 7. What should be the minimum balance of your monthly take home salary so that you will be able to afford to purchase the house? a 147,451.38 b. 148,051.38 c. 151,048.38 d. 184,051.38 8. How much is the total interest expense on the financing agreement ? a. 30,235,414 b. 23,335,216 c. 20,235,414 d. 13,265,992arrow_forward
- Your group receives a phone proposal to invest in a new business. Thecaller informs you that it will take a $70,000 down payment and the investmentwill return $10,000 a year for the next 10 years. He tells you that theinvestment will return 14 percent. If current interest rates are 8 percent,what is the present value of this investment? How did the caller get14 percent?arrow_forwardYour employer will give you a raise in an annual salary of $10,000 if you pass a Professional Engineering exam. Assume that you can work for the company for n years. Use the discount rate (r) of 8% per year. a. What is PV of the raise for n = 35? b. What is AE of the raise? c. Redo part a for n = ∞.arrow_forwardAn investor is considering the following opportunity: He will put capital into a start-up company today. He will not receive any cash flows from the investment until end of the 5th year. At that point, he will receive 11.00 years of $20,000.00 per year. If his discount rate on this investment is 14.00%, what is the value of this opportunity today?arrow_forward
- The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments. Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk. Thirdly, client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29.…arrow_forwardThe managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments. Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk. Thirdly, client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29.…arrow_forwardAn investor who recently returned from overseas decided to invest in a venture proposed by leading investment company.The investor is expected to receive ten(10) sum payment of $5000 at the end of each year for ten(10)years.However payments increased by 5% on the second(2nd),10% on the fourth (4th),15% on the sixth(6th),20% on the eighth(8th) and 25% on the tenth(10th) payment. Calculate the sum that should be payed to him at an interest of 5%arrow_forward
- 2. Immediately after receiving your Biosystems engineering degree, you will be employed by a multinational company. Your initial salary will be $60,000 per year. Your plans are to invest 10 percent of your gross salary each month. You believe your salary will increase annually at a rate ranging from 3 percent to 15 percent, depending on your performance. Likewise, after analyzing various investment opportunities, you anticipate earning between 5 percent and 10 percent annually on your investment portfolio of mutual funds, stocks, bonds, U.S. Treasury notes, and certificates of deposit. Your annual inflation will most likely vary from 2 percent to 5 percent over your professional career. With this information in hand, calculate the range of possible values of your net worth, first after 30 years of employment, and second after 40 years of employment.arrow_forwardYour family business has been presented with three investment options, all requiring the same initial investment: Option 1 – returns $10,000 annually for the next three years. Option 2 – returns $5,000 every six-months for the next three years. Option 3 – returns $30,000 at the end of the three years. Assuming all other conditions are the same over the three years, which option would yield the best return for your investment? Select the best option: Option 1 Option 3 All three options offer the same return hence any option is a good option Option 2arrow_forward2. You plan to purchase an office space in Chamblee's Chinatown for $50,000 at the end of year 2021. You estimate that by renting out that office space, you will receive a stream of rental income for the coming eight years at the end of each year as shown in below. After eight years, you estimate that you can still sell the office space for $45,000 at the end of the eighth year. Is this project a good investment if you project that the normal rate of return in this line of business is 12%? How about if the general rate of return is 15% ? 8%? Year 1 $6,000 Year 5 $7,500 Year 2 $6,500 Year 6 $8,500 Year 3 $7,000 Year 7 $8,500 Year 4 $7,500 Year 8 $8,500 3. Based on the information provided in Step 2 above, compute the Internal Rate of Return for the investment. 4. While you were waiting for your first job interview results to come, you spent several dollars to buy a Georgia Educational Lotto and were lucky enough to win a $1 million prize. The prize is to be awarded in 20 annual payments…arrow_forward