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Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the racquets. This method will produce a $24M cashflow next year. The firm could also choose a new experimental method for producing racquets. This method has lower costs if it works. If the new technology works it will produce a cashflow of $28M next year. If it is unsuccessful it will produce a zero cashflow next year. The probability of success is 0.8 and the cashflows are uncorrelated with the market return. Both methods require a $20M dollar investment today. There are no cashflows after next year. The risk-free rate is 10%. The market price of risk is 8.4%. Games, Inc. has decided to raise $20M by issuing debt. The bondholders believe Games Inc’s assertion that they will use the old technology. (You could also assume that the bondholders have never heard about the new technology).
What is the NPV of the equity if the old technology is chosen? What is the NPV of the equity if the new technology is chosen? Which project will shareholders choose? [5 Marks]
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a
proven technology to produce the racquets. This method will produce
a $24M cashflow next year. The firm could also choose a new
experimental method for producing racquets. This method has lower
costs if it works. If the new technology works it will produce a
cashflow of $28M next year. If it is unsuccessful it will produce a
zero cashflow next year. The probability of success is 0.8 and the...
Games, Inc. is considering selling tennis racquets. It can use a proven technology to produce the...
Games, Inc. is considering selling tennis racquets. It can use a
proven technology to produce the racquets. This method will produce
a $24M cashflow next year. The firm could also choose a new
experimental method for producing racquets. This method has lower
costs if it works. If the new technology works it will produce a
cashflow of $28M next year. If it is unsuccessful it will produce a
zero cashflow next year. The probability of success is 0.8 and the...
Sportway Inc. produces high-quality tennis racquets and golf clubs using a patented forming process and high-quality...
Sportway Inc. produces high-quality tennis racquets and golf
clubs using a patented forming process and high-quality
hand-finishing. Products move through two production departments:
Forming and Finishing. The company uses departmental overhead rates
to allocate overhead costs. Overhead is allocated based on
machine-hours in Forming and direct labour cost in Finishing.
Information related to estimated volumes and denominator values for
the coming year are provided below:
Tennis Racquets
Golf Clubs
Annual production and sales
5,200
8,300
Direct materials per unit
$...
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allowing cells to repair Cas9 cuts by non-homologous end
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Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $28,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $4,000 per year for 2
years. Fethe's cost of capital is 14%. Do not round intermediate
calculations.
What is...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $24,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%. Do not round intermediate
calculations.
What is...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%.
What is the expected NPV of the...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $5,000 per year for 2
years. Fethe's cost of capital is 10%.
1. What is the expected NPV of...
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games....
Fethe's Funny Hats is considering selling trademarked,
orange-haired curly wigs for University of Tennessee football
games. The purchase cost for a 2-year franchise to sell the wigs is
$20,000. If demand is good (40% probability), then the net cash
flows will be $25,000 per year for 2 years. If demand is bad (60%
probability), then the net cash flows will be $3,000 per year for 2
years. Fethe's cost of capital is 11%. Do not round intermediate
calculations.
What is...
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