Question : 43.A firm considering investing $10 million today to start a : 1325718

 

 

43.A firm is considering investing $10 million today to start a new product line. The future of the project is unclear however and depends on the state of the economy. The project will last 5 years. The yearly cash flows for the project are shown below for the different states of the economy. What is the expected NPV for the project if the cost of capital is 12%?

 

ProjectChance ofYearly

Outcome     Outcome     Cash Flow

GOOD25%$8.00

AVERAGE50%$3.00

BAD25%($2.00)

 

a.-$2.23 million

b.-$1.15 million

c.-$0.75 million

d.$0.81 million

 

 

 

44.A firm is considering investing $10 million today to start a new product line. The future of the project is unclear however and depends on the state of the economy. The project will last 4 years. The yearly cash flows for the project are shown below for the different states of the economy. What is the expected NPV for the project if the cost of capital is 15%?

 

ProjectChance ofYearly

Outcome     Outcome     Cash Flow

GOOD25%$7.00

BAD75%-$2.50

 

a.-$17.14 million

b.-$12.13 million

c.-$10.36 million

d.-$4.25 million

 

 

 

 

45.Which answer describes an analysis of what happens to NPV estimates when we change the values of one variable at a time?

a.Forecasting simulation

b.Monte Carlo simulation

c.Sensitivity analysis

d.Scenario analysis

 

 

 

46.Which approach estimates NPV by taking a distribution of values for each of the model’s assumptions?

a.Forecasting simulation

b.Monte Carlo simulation

c.Sensitivity analysis

d.Scenario analysis

 

 

 

47.Which approach estimates NPV by changing the value of several assumptions at once to represent possible outcomes of the project?

a.Forecasting simulation

b.Monte Carlo simulation

c.Sensitivity analysis

d.Scenario analysis

 

 

 

48.As a young entreprenuer, you are considering opening a new restaurant in your hometown. You plan on operating the restaurant for four years and then either expand the business or close the restaurant and move onto something else. An economist has estimated the value of your option to expand at $300,000 in today’s dollars. Given the estimates below, what is the project value of the new restaurant business if cash flows are discounted at 12%?

 

YEAR01234

Cash flow-$200,000$25,00025,00025,00025,000

 

a.-$124,066

b.$75,933

c.$175,933

d.$275,933

 

 

 

49.A firm has estimated the NPV of a new product release as -$100,000. However, if the product is a failure, the firm estimates it can sell off the equipment to help cash flow. An analyst estimates the value of abandoning the product release at $125,000. The cost of capital for the firm is 10%. What is the project value for the firm?

a.-$100,000

b.$10,000

c.$25,000

d.$225,000

 

 

 

50.A firm has a capital structure containing 40 percent debt, 10 percent preferred stock, and 50 percent common stock equity. The firm’s debt has a yield to maturity of 9.50 percent. Its preferred stock’s annual dividend is $7.50 and the preferred stock’s current market price is $50.00 per share. The firm’s common stock has a beta of 0.90 and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent, respectively. The firm is subject to a 40 percent marginal tax rate. The market value of debt is $100 million. How many shares of preferred stock should be outstanding for the capital structure to be correct?

a.125,000 shares

b.250,000 shares

c.500,000 shares

d.625,000 shares

 

 

 

51.A firm has a capital structure containing 40 percent debt, 10 percent preferred stock, and 50 percent common stock equity. The firm’s debt has a yield to maturity of 9.50 percent. Its preferred stock’s annual dividend is $7.50 and the preferred stock’s current market price is $50.00 per share. The firm’s common stock has a beta of 0.90 and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent, respectively. The firm is subject to a 40 percent marginal tax rate. What is the WACC for the firm?

a.8.75%

b.8.93%

c.9.16%

d.10.06%

 

 

 

52.A firm has a capital structure of 40% debt and 60% equity. The firm has bonds outstanding with a face value of $20 million. The bonds pay, on average, a 8% annual coupon and have an average maturity length of 7 years. The market value of the bonds is 110% of face value and the tax rate facing the firm is 40%. The firm has common stock with a beta of 1.25. The risk free rate on Treasury bonds is 2%, while the market risk premium is 8%. What is the WACC for the firm?

a.8.69%

b.9.13%

c.9.68%

d.11.15%