Question : 73.You a professional football running back who eligible to be : 1325721

 

 

73.You are a professional football running back who is eligible to be a free agent. You are offered a two-year contract to play for your current team for $3,000,000. If you accept that contract, the firm retains your rights and you will not be able to play for another team at the conclusion of the contract. Otherwise, you can play for you current team for two years at a price of $2,000,000 but you have the ability to play for any team at the expiration of this agreement. What is the value of the option to pay for any team you like after two years? Assume a discount rate of 5%.

a.$5,578,231

b.$3,718,821

c.$1,859,410

d.none of the above

 

 

 

 

 

 

74.You are considering the purchase of a business that produces net cash flows of $350,000 per year in perpetuity. In a perfectly competitive market, what should be the asking price for the business if the firm’s cost of capital is 15%?

a.$350,000

b.$3,050,000

c.$2,333,333

d.none of the above

 

 

 

75.You are a gold producer and have noticed that the value of your business may increase even though the price of gold falls. Your explanation for this phenomenon is

a.that the relationship between the value of future cash flows and interest rates is positive.

b.that increased risk may increase the real option value of the firm.

c.that cheaper gold prices are good for the economy and that must be good for the firm.

d.none of the above

 

 

 

76.You are an aerospace defense contractor and you routinely work projects for the U.S. Department of Defense that generate cash flows that by themselves, do not cover the cost of capital for the firm. One reason for this may be

a.because you can make up negative NPV projects by taking on more volume.

b.because the projects have an implicit option to work on non-defense related projects at a lower direct research cost than projects without defense related work.

c.because there is a taxable exemption from doing patriotic work.

d.none of the above.

 

 

 

77.You are considering the purchase of production volume of 100,000 widgets per year. You can purchase either a single 100,000 widget per year machine that costs $1,000,000 or first buy a 50,000 per year machine and then if sales volume permits, purchase another machine later. If widget production volume costs the same per unit to produce, what should the cost of the 50,000 per year machine be (to you) if there is a real option to expand production?

a.less than $500,000

b.$500,000

c.greater than $500,000

d.it is impossible to tell from the information given

 

 

 

78.You are about to embark on a project that has an equal 50% probability of generating a $10,000 windfall or a loss of $4,000. However, an insurance company comes to you saying they will sell you an indemnification policy for the event that you incur the $4,000 loss. If the insurance company is basing their charge for the policy on real option analysis, what will they charge you for the policy?

a.$1,000

b.$2,000

c.$4,000

d.none of the above

 

 

 

 

 

 

79.Lunar Surf Boards has annual fixed costs of $5,000 with a variable cost of $10 per unit and a sales price of $20 per unit. Lunar expects to sell 1,000 units this year without much trouble. However, Lunar is concerned about the scenario that variable costs will increase 10% this year. If that happens, what will be Lunar’s earnings before interest and taxes?

a.$6,000

b.$5,000

c.$4,000

d.none of the above

 

 

 

 

80.Jupitor Surf Boards has annual fixed costs of $5,000 with a variable cost of $10 per unit and a sales price of $20 per unit. Jupitor expects to sell 1,000 units this year without much trouble. However, Jupitor is concerned about the scenario that all costs will increase 10% this year. If that happens, what will be Jupitor’s earnings before interest and taxes?

a.$6,000

b.$5000

c.$4,000

d.$3,500

 

 

 

 

81.The discount rate used to evaluate a firm’s projects should:

a.reflect the opportunity costs of investing in either the firm’s project or a similar project

b.be high enough to compensate investors for the risk of the project

c.be the same across all the firm’s projects

d.Both (a) and (b) are true

e.All of the above

 

 

 

82.Financial leverage:

a.results when a firm finances a portion of its assets with debt

b.can enhance a firm’s earnings if sales increase

c.can impact the beta of the firm’s stock

d.All of the above

e.Only (a) and (b) are true