In: Finance

The market capitalization of this company is $140 million, it's beta is 0.75, the risk free rate is 2% and the market risk premium is 6%.

The project costs $1 million and has expected cashflows of $75,000 a year forever. This same firm now realizes that the project they were considering before has a timing option. Specifically, they can wait a year to see if the product the project will create will catch on in the market, or not. At time 1, they will see whether the product will do well ($100k per year forever), or badly ($50k a year forever). There is an equal probability of the product doing well or badly. If they start the project if it does well, they will pay $1.25million since many of the raw materials to produce this product will be in demand (as opposed to $1 million if they start immediately). If they start the project if it does badly, they will still only pay $1 million to start it.

a) What is the NPV, at time 1, of starting the project?

b) What is the NPV of doing the project at time 1 if the product doesn't do well?

c) What is the overall value of waiting at time 0? (remember to factor in the appropriate decisions to not do the project if the NPV is 0 at time 1, and also to discount time 1 cashflows to time 0).

Expected rate of return (cost of equity) = Risk free rate + Beta * Market risk premium = 0.02 +0.75 x 0.06 = 0.065 or 6.5%

Expected Cash outflows at time 1 = $ 1,250,000 x 0.5 +$ 1,000,000 x 0.5 = $1,125,000

Expected cash inflows per year at time 1 = $100,000 x 0.5 + $50,000 x 0.5 = $75,000

PV of annuity in perpetuity = a / r where a = Expected cash inflows and r(discount rate) = 0.065

PV of cash inflows at time 1 = $75,000/0.065 = $ 1,153,846

PV of cash outflows at time 1 = $ 1,125,000

**a) Therefore NPV at time 1 of starting the project = $
1,153,846 - $ 1,125,000 = $ 28,846**

**b) If the product doesn't do well , then NPV at time 1 =
$1,000,000 - 50000/0.065 = - $ 230,769**

c) If the project is started at time 0

NPV at time 0 = -$1,000,000 +$ 75000/0.065 = $ 153,846

If the project is started at time 1, NPV at time 1 = -$ 1,250,000 +$100,000/0.065 = $ 288,462

NPV at time 0 if project started at time 1 = $288,462/(1+0.065) = $270,856

**Hence Overall value of waiting at time 0 = $ 270,856 - $
153,846 = $ 117,010**

A company has a beta of 0.75. The risk-free rate is 4.65% and
the market risk premium is 7.80%. The company is expected to pay
annual dividends. The first dividend is expected to be paid in 4
years and is expected to be $1.30. The dividend in year 5 is
expected to be $2.30, and then the dividend is expected to grow
1.5% annually thereafter. What should the price of the stock
be?

The
beta on Stock A equals 0.75, and the expected
return equals 8.625%. The risk free rate equals 3%.
Calculate the expected return on the
market.
(Enter percentages as
decimals and round to 4 decimals)

REQUIRED RATE OF RETURN A stock has a beta of
0.75. The risk-free rate is 9%, and the market risk premium is 8%.
What is the stock’s required rate of return?

A stock has an expected return of 0.07, its beta is 0.75, and
the risk-free rate is 0.03. What must the expected return on the
market be? Enter the answer with 4 decimals (e.g. 0.0567).

A company has unleveraged beta of 1.7, risk free rate
7% and market risk premium for 5%. The applicable tax rate is
40%.
The company needs to finance its new project having three different
scenarios of financing:
Scenario Debt ratio Interest rate (before tax)
EPS
1 0% 0% $2.7
2 20% 12% $3.8
3 80% 17% $4.2
2) If the company is unleveraged, its Price per share
is *
$11.75
$22.41
$17.42
None of the above
3) If the company...

If the market risk premium is 2%, the risk-free rate is 4.4% and
the beta of a stock is 1.2, what is the expected return of the
stock?

A stock's beta is 5, the market risk premium is 6%, and the
risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
A stock's beta is 1.5, the expected market return is 6%, and
the risk-free rate is 2%. According to the CAPM, what discount rate
should you use when valuing the stock?
You have 2 assets to choose from when forming a portfolio: the
market portfolio and a risk-free...

If a company has a beta of 1.3, risk free rate 3% and market
index return 8% Q5: what is market risk premium? what is cost of
equity?

Zetta Company has unleveraged beta 1.3, risk free rate 7% and
market risk premium for 5%. The applicable tax rate is 40%. The
company needs to finance its new project under two different
scenarios.
Scenario Debt ratio Interest rate EPS
1 0% 0% $2.40
2 30% 10% $3.40
6. WACC under scenario number 2 equals to *
a)12.42%
b)11.55%
c)13.50%
d)14.24%
e)None of the above
7. The price per share under scenario number 2 equals to *
a)$28.50
b)$26.50
c)$24.30...

Zetta Company has unleveraged beta 1.3, risk free rate 7% and
market risk premium for 5%. The applicable tax rate is 40%. The
company needs to finance its new project under two different
scenarios.
Scenario Debt ratio Interest rate EPS
1 0% 0% $2.40
2 30% 10% $3.40
6. WACC under scenario number 2 equals to *
a)12.42%
b)11.55%
c)13.50%
d)14.24%
e)None of the above
7. The price per share under scenario number 2 equals to *
a)$28.50
b)$26.50
c)$24.30...

ADVERTISEMENT

ADVERTISEMENT

Latest Questions

- Two broad perspectives have been outlined; the consensus perspective and the conflict perspective. The contemporary The...
- Create a matlab function that converts Miles per hour to feet per second. Please show code...
- For this portion of the lab you will design the solution so that you perform some...
- In both a command economy and in a monopoly, prices are not set according to the...
- Ex1) Download the code from the theory section, you will find zipped file contains the code...
- The production department of Zan Corporation has submitted the following forecast of units to be produced...
- Purpose: Connect and critique Fredrickson’s theory in personal experience. 1.List the four ways that positive emotions...

ADVERTISEMENT