PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 9, Problem 19PS
a.
Summary Introduction
To discuss: The inappropriate thing that takes place while utilizing the 40% rate to offset the political risk.
b.
Summary Introduction
To calculate: The real worth of the payment.
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Students have asked these similar questions
ces
Mom and Pop Groceries has just dispatched a year's supply of groceries to the government of the Central Antarctic Republic. Payment
of $250,000 will be made one year hence after the shipment arrives by snow train. Unfortunately, there is a good chance of a coup
d'état in which case the new government will not pay. Mom and Pop's controller therefore decides to discount the payment at 40%
rather than at the company's 12% cost of capital.
a. Is it proper to use 40% as the discount rate in this situation?
No
O Yes
b. How much is the $250,000 payment really worth if the odds of a coup d'état are 25% ? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Payment value
$ 175,714.29
You are a dog toy producer that wants to establish a subsidiary in the small European country of Belgium. However, you have heard that the new prime minister is a cat lover and may shut down (part of) your operations. Therefore, you expect to be present in Belgium two years at most, after which you will move your subsidiary elsewhere.
The expected cash flows for the first year are 15.4 million if your Belgian subsidiary survives and 1.2 million if the local government intervenes. They are 14.7 million if the subsidiary survives in year 2 and 1.9 million if the government intervenes.
The subsidiary shuts down after year 2; there are no further cash flows. You think there is a 35.8% chance of government intervention in year 1 and a 47.6% chance of government intervention in year 2. The discount rate is 4.4% p.a.
What is the project’s NPV?
a.
14.9515 million
b.
6.4251 million
c.
0.4115 million
d.
5.0405 million
e.
9.4995 million
A bank is considering two alternatives for handling its service calls in the next decade ( treat this as one period). The projected number of service calls is 10,000,000. If the bank sets up its own service call center in the U.S., the fixed cost is estimated to be $2,700,000, and the variable cost is calculated to be 32 cents per call. If the call service is outsourced to a foreign company, the fixed cost would be $240,000, and the unit charge would be 57 cents per call.
(a)What is the break-even number of service calls?
(b)Would the bank set up its own service call center or outsource call handlings? (Enter 1 for Produce or enter O for Outsource)
(C)What would be the dollar amount that the bank can save by choosing the better option? (Cost difference between the two options)
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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