Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Question
Chapter 24, Problem 15QP
a)
Summary Introduction
To find: The
Introduction:
The variations between the present value of the
b)
Summary Introduction
To find: The value of the option to abandon.
Introduction:
The cash value or the equivalent value that are associated with an asset is the abandonment value and it is also known as the liquidation value. The abandonment value is significant for a firm at the time of analyzing the profitability of a specific project or asset and taking decisions on whether it has to be maintained or abandoned.
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Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?
Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project. Be complete and thorough in your answer.
Question 6
a. What are the shortcomings of the internal rate of return criterion? How do you make an investment
decision based on the IRR? How would the NPV of the same project look?
b. An electric car manufacturer worries that the price of the Lithium-ion battery might increase in the future,
which would make it more expensive to produce cars. Discuss at least two strategies you can use to hedge
the firm's exposure to rising battery prices.
c. Explain the difference between unique risk and systematic risk
Chapter 24 Solutions
Fundamentals of Corporate Finance
Ch. 24.1 - What is a call option? A put option?Ch. 24.1 - If you thought that a stock was going to drop...Ch. 24.2 - What is the value of a call option at expiration?Ch. 24.2 - What are the upper and lower bounds on the value...Ch. 24.2 - Prob. 24.2CCQCh. 24.3 - Prob. 24.3ACQCh. 24.3 - Prob. 24.3BCQCh. 24.3 - Prob. 24.3CCQCh. 24.4 - Prob. 24.4ACQCh. 24.4 - Prob. 24.4BCQ
Ch. 24.5 - Why do we say that the equity in a leveraged firm...Ch. 24.5 - All other things being the same, would the...Ch. 24.6 - Prob. 24.6ACQCh. 24.6 - Prob. 24.6BCQCh. 24.6 - Prob. 24.6CCQCh. 24.7 - Prob. 24.7ACQCh. 24.7 - Prob. 24.7BCQCh. 24.7 - Prob. 24.7CCQCh. 24.7 - Prob. 24.7DCQCh. 24 - Steve sold a put option when the option premium...Ch. 24 - Prob. 24.2CTFCh. 24 - Prob. 24.4CTFCh. 24 - Prob. 1CRCTCh. 24 - Prob. 2CRCTCh. 24 - Prob. 3CRCTCh. 24 - Prob. 4CRCTCh. 24 - Prob. 5CRCTCh. 24 - Options and Stock Risk [LO2] If the risk of a...Ch. 24 - Prob. 7CRCTCh. 24 - Prob. 8CRCTCh. 24 - Prob. 9CRCTCh. 24 - Prob. 10CRCTCh. 24 - Prob. 11CRCTCh. 24 - Prob. 12CRCTCh. 24 - Prob. 13CRCTCh. 24 - Prob. 14CRCTCh. 24 - Prob. 15CRCTCh. 24 - Calculating Option Values [LO2] T-bills currently...Ch. 24 - Understanding Option Quotes [LO1] Use the option...Ch. 24 - Calculating Payoffs [LO1] Use the option quote...Ch. 24 - Calculating Option Values [LO2] The price of Build...Ch. 24 - Calculating Option Values [LO2] The price of...Ch. 24 - Using the Pricing Equation [LO2] A one-year call...Ch. 24 - Equity as an Option [LO4] Rackin Pinion...Ch. 24 - Equity as an Option [LO4] Buckeye Industries has...Ch. 24 - Calculating Conversion Value [LO6] A 1,000 par...Ch. 24 - Convertible Bonds [LO6] The following facts apply...Ch. 24 - Calculating Values for Convertibles [LO6] You have...Ch. 24 - Calculating Warrant Values [LO6] A bond with 20...Ch. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Prob. 15QPCh. 24 - Prob. 16QPCh. 24 - Intuition and Option Value [LO2] Suppose a share...Ch. 24 - Intuition and Convertibles [LO6] Which of the...Ch. 24 - Convertible Calculations [LO6] Starset, Inc., has...Ch. 24 - Abandonment Decisions [LO5] Allied Products, Inc.,...Ch. 24 - Pricing Convertibles [LO6] You have been hired to...Ch. 24 - Abandonment Decisions [LO5] Consider the following...Ch. 24 - SS Airs Convertible Bond SS Air is preparing its...Ch. 24 - Prob. 2MCh. 24 - Prob. 3MCh. 24 - Prob. 4MCh. 24 - Prob. 5M
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- An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. Economic Condition Investment Poor Average Good Excellent (S1) (S2) (S3) (S4) A 50 75 20 30 B 80 15 40 50 C -100 300 -50 10 D 25 25 25 25 What decision would be made under minimax regret?arrow_forward5. I need help with multiple choice finance home work question If a project has a NPV of zero, the project: Has a discounted payback period that is shorter than the life of the project. Has a profitability index that is greater than one. Should be accepted even if the firm has alternative investments with a positive NPV. Should be rejected. Is expected to earn a return equal to the firm's required return.arrow_forwardMaking the accept or reject decision Hungry Whale Electronics's decision to accept or reject project Alpha is independent of its decisions on other projects. If the firm follows the NPV method, it should project Alpha. Which of the following statements best explains what it means when a project has an NPV of $0? O When a project has an NPV of $0, the project is earning a rate of return less than the project's weighted average cost of capital. It's OK to accept the project, as long as the project's profit is positive. O When a project has an NPV of $0, the project is earning a rate of return equal to the project's weighted average cost of capital. It's OK to accept a project with an NPV of $0, because the project is earning the required minimum rate of return. O When a project has an NPV of $0, the project is earning a profit of $0. A firm should reject any project with an NPV of $0, because the project is not profitable.arrow_forward
- 35. The relationship between the payback method and the internal rate of return is that: Group of answer choices a. The payback period is the present value factor for the IRR. b. A project whose payback period does not meet the company’s cut-off rate for payback will not meet the company’s criterion for IRR. c. A payback period of less than one-half of the life of a project will yield an IRR lower than the target rate. d. The discounted payback period is exactly the same as the IRR.arrow_forward36 The relationship between the payback method and the internal rate of return is that: Group of answer choices The discounted payback period is exactly the same as the IRR. The payback period is the present value factor for the IRR. A payback period of less than one-half of the life of a project will yield an IRR lower than the target rate. A project whose payback period does not meet the company’s cut-off rate for payback will not meet the company’s criterion for IRR.arrow_forwardwhich one is correct please confirm? Q2" Which of the following strategies will be profitable if the price of the underlying asset is expected to decrease? (There may be more than one correct response.) Buying a put Buying a call. Selling a put Selling a call.arrow_forward
- The project is accepted اخترأحد الخيارات a. If the profitability index is zero b. if the profitability index is less than one c. If the profitability index is greater than hundred d. If the profitability index is negative e. None of the option What is the limitation of Traditional approach of Financial Management? اخترأحد الخيارات a. All of the option b. More emphasis on long term problems c. Ignores allocation of resources d. One-sided approacharrow_forwardIn a few sentences, answer the following question as completely as you can. According to your textbook, “an investment should be accepted if the net present value is positive and rejected if it is negative” (p. 239). What does an NPV of zero mean?If you were a financial decision maker facing a project with NPV of zero (or close to zero) what would you do? Can you think of any other factors that might influence your decision?arrow_forward16. Which of the following statements regarding the net present value rule and the rate of return rule is false? A. Accept a project if NPV > cost of investment.B. Accept a project if NPV is positive.C. Accept a project if return on investment exceeds the rate of return on an equivalent-risk investment in the financial market.D. Reject a project if NPV is negative.arrow_forward
- Suppose that you found the probabilities and expected NPVs of 3 scenarios for a timing option: E(NPV) probability $0.15 0.30 $10.35 0.50 $42 0.20 1. What is the expected NPV of the timing option? Show your work. 2. Suppose, that the expected NPV of the project if proceeding today is $14. Should the project be delayed based on your finding in part 1 or should the management implement it today? Briefly explain.arrow_forwardQuestion Answer 1. If the payback on a project is 3.2 years will the discounted payback be more or will it be less than 3.2 years? 2. If the IRR of a project is 10% will the MIRR be more or will it be less than 10%? 3. What does Payback inform us about the risk of project? 4. What does IRR inform us about the risk of project?arrow_forwardWhich of the following statements is true? Multiple Cholce There Is no correlation between net present value and Internal rate of return. A project with a positive net present value will have a discount rate that Is greater than the Internal rate of return. None of the statements are true Glven several projects with positive net present values, the company should choose the project with the hlghest net present value. A project with a positive net present value will have a discount rate that Is less than the Internal rate of return.arrow_forward
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