Lynn transfers property (basis of $225,000 and fair market value of $300,000) to Condor Corporation in exchange for § 1244 stock. The transfer qualifies as a nontaxable exchange under § 351. In the current year, Lynn sells the Condor stock for $100,000. Assume Lynn files a joint return with her husband, Ricky. With respect to the sale, Lynn has:
a. A capital loss of $125,000. b. An ordinary loss of $100,000 and a capital loss of $100,000. c. An ordinary loss of $125,000. d. An ordinary loss of $100,000 and a capital loss of $25,000. e. None of these choices are correct.
In: Finance
|
Current stock price |
$70 |
|
Stock price volatility (standard deviation) |
0.0693 |
|
Continuously compounded annual risk free rate |
11.94% |
|
Strike price (or exercise price) |
$80 |
|
Time to expiration (in years) |
9 months |
What is the option premium if this option is a European put and the stock will pay a dividend of $3 in six months?
In: Finance
In: Finance
a). What is the market risk premium if the risk free rate is 5% and the expected market return is given as follows?
| State of nature | Probability | Return |
| Boom | 20% | 30% |
| Average | 70% | 15% |
| Recession | 10% | 5% |
b). A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:
| Project A | Project B |
| Initial Investment | End-of-Year Cash Flows | Initial Investment | End-of-Year Cash Flows |
| RM40,000 | RM 20,000 | RM 90,000 | RM 40,000 |
| RM 20,000 | RM 40,000 | ||
| RM 20,000 | RM 80,000 |
i). Which project should the firm choose if it has a required payback period of two years? Explain your answer.
ii). If the firm's required rate of return is 15%, which project should be chosen? Why?
In: Finance
NPV
Your division is considering two projects with the following cash flows (in millions):
| 0 1 2 3 |
| Project A | -$17 | $8 | $8 | $3 |
| Project B | -$26 | $13 | $10 | $9 |
What are the projects' NPVs assuming the WACC is 5%? Round your
answer to two decimal places. Do not round your intermediate
calculations. Enter your answer in millions. For example, an answer
of $10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
Project A $ million
Project B $ million
What are the projects' NPVs assuming the WACC is 10%? Round your
answer to two decimal places. Do not round your intermediate
calculations. Enter your answer in millions. For example, an answer
of $10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
Project A $ million
Project B $ million
What are the projects' NPVs assuming the WACC is 15%? Round your
answer to two decimal places. Do not round your intermediate
calculations. Enter your answer in millions. For example, an answer
of $10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
Project A $ million
Project B $ million
What are the projects' IRRs assuming the WACC is 5%? Round your
answer to two decimal places. Do not round your intermediate
calculations.
Project A %
Project B %
What are the projects' IRRs assuming the WACC is 10%? Round your
answer to two decimal places. Do not round your intermediate
calculations.
Project A %
Project B %
What are the projects' IRRs assuming the WACC is 15%? Round your
answer to two decimal places. Do not round your intermediate
calculations.
Project A %
Project B %
In: Finance
A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. The firm could spend an additional $10 million at Year 0 to mitigate the environmental Problem, but it would not be required to do so. Developing the mine (without mitigation) would cost $60 million, and the expected cash inflows would be $20 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $21 million. The risk-adjusted WACC is 12%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Do not round your intermediate calculations.
Enter your answer for NPV in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Do not round your intermediate calculations.
Enter your answer for NPV in millions. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
In: Finance
A project has annual cash flows of $4,000 for the next 10 years and then $10,500 each year for the following 10 years. The IRR of this 20-year project is 13.08%. If the firm's WACC is 11%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
In: Finance
NPV PROFILES: TIMING DIFFERENCES
An oil-drilling company must choose between two mutually exclusive extraction projects, and each costs $11.8 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.16 million. Under Plan B, cash flows would be $2.0967 million per year for 20 years. The firm's WACC is 12%.
| Discount Rate | NPV Plan A | NPV Plan B |
| 0% | $ million | $ million |
| 5 | million | million |
| 10 | million | million |
| 12 | million | million |
| 15 | million | million |
| 17 | million | million |
| 20 | million | million |
Identify each project's IRR. Round your answers to two decimal places. Do not round your intermediate calculations.
Project A %
Project B %
Find the crossover rate. Round your answer to two decimal places. Do not round your intermediate calculations.In: Finance
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 7%.
| 0 | 1 | 2 | 3 | 4 | ||||||
| Project A | -1,000 | 600 | 355 | 210 | 260 | |||||
| Project B | -1,000 | 200 | 290 | 360 | 710 | |||||
What is Project A's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
What is Project A's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
What is Project B's payback? Round your answer to four decimal places. Do not round your intermediate calculations.
What is Project B's discounted payback? Round your answer to four decimal places. Do not round your intermediate calculations.
In: Finance
A company is analyzing two mutually exclusive projects, S and L, with the following cash flows:
| 0 | 1 | 2 | 3 | 4 |
| Project S | -$1,000 | $880.19 | $250 | $15 | $10 |
| Project L | -$1,000 | $10 | $240 | $420 | $792.65 |
The company's WACC is 8.5%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.) Round your answer to two decimal places.
%
In: Finance
An electric utility is considering a new power plant in northern Arizona. Power from the plant would be sold in the Phoenix area, where it is badly needed. Because the firm has received a permit, the plant would be legal; but it would cause some air pollution. The company could spend an additional $40 million at Year 0 to mitigate the environmental problem, but it would not be required to do so. The plant without mitigation would cost $210.64 million, and the expected cash inflows would be $70 million per year for 5 years. If the firm does invest in mitigation, the annual inflows would be $75.80 million. Unemployment in the area where the plant would be built is high, and the plant would provide about 350 good jobs. The risk adjusted WACC is 19%.
Calculate the NPV and IRR with mitigation. Round your answers to
two decimal places. Enter your answer for NPV in millions. Do not
round your intermediate calculations. For example, an answer of
$10,550,000 should be entered as 10.55. Negative value should be
indicated by a minus sign.
NPV $ million
IRR %
Calculate the NPV and IRR without mitigation. Round your answers
to two decimal places. Enter your answer for NPV in millions. Do
not round your intermediate calculations. For example, an answer of
$10,550,000 should be entered as 10.55.
NPV $ million
IRR %
In: Finance
Project L costs $50,000, its expected cash inflows are $15,000 per year for 11 years, and its WACC is 10%. What is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
In: Finance
ZEN Inc. is financed by 3 million shares of common stock and by $5 million face value of 8% convertible debt maturing in 2026. Each bond has a face value of $1,000 and a conversion ratio of 200. What is the value of each convertible bond at maturity if ZEN’s net assets are:
In: Finance
In: Finance
Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 8%.
| 0 | 1 | 2 | 3 | 4 | ||||||
| Project A | -1,050 | 610 | 385 | 290 | 330 | |||||
| Project B | -1,050 | 210 | 320 | 440 | 780 | |||||
What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places.
What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.
In: Finance