Question : 63.Which of the following not required for a firm to : 1325720

 

 

63.Which of the following is not required for a firm to utilize its current weighted average cost of capital to evaluate a future project?

a.the firm will not alter its capital structure

b.the future project is very similar to the firm’s existing assets

c.the future project has an expected life that is similar to its existing project lives

d.neither a nor b is required

 

 

 

64.CapCo has a capital structure that is composed of $10 million of debt and $30 million of common equity. If CapCo is in the 30% marginal tax rate, what is its WACC if the yield to investors on CapCo debt is 8% and the cost of CapCo common equity is 12%?

a.8.3%

b.10.4%

c.11.0%

d.none of the above

 

 

 

65.WidgetMaker has discovered that its fixed costs are $100,000 per month. If WidgetMaker sells its widgets for $35 per unit based upon a cost of $15 per unit to manufacture (variable costs) then how many widgets per year must WidgetMaker sell in order to break-even?

a.5,000

b.34,286

c.60,000

d.None of the above

 

 

 

66.WidgetMaker has discovered that its fixed costs are $100,000 per month. If WidgetMaker sells its widgets for $35 per unit based upon a cost of $15 per unit to manufacture (variable costs) then what dollar sales per year must WidgetMaker sell in order to break-even?

a.$175,000

b.$1,200,000

c.$2,100,000

d.none of the above

 

 

 

67.If a company decides to change one input at a time in its net present value analysis, in order to measure the NPV impact of such a change then the firm is performing

a.a Monte Carlo simulation.

b.scenario analysis.

c.a sensitivity analysis.

d.none of the above

 

 

 

68.A firm prefers to assume a probability distribution concerning each of the major inputs for the net present value of a project and then randomly draw those inputs over and over again until a distribution is generated for the net present value of an entire project. The firm is performing

a.a Monte Carlo analysis on its projects.

b.sensitivity analysis on its projects.

c.a scenario analysis on its projects.

d.none of the above.

 

 

 

69.You are given the opportunity to play a game of high stakes gambling. The game begins by you paying an entry fee of $35,000,000 followed by a fair coin toss. If the coin toss is “heads” then you have an 80% probability of receiving a perpetuity of $10,000,000 per year and a 20% probability of receiving a perpetuity of $1,000,000 per year. Assume that the proper discount rate for the perpetual cash flow is 10%. If the coin toss is “tails”you can continue to play but you will lose $50,000,000 with certainty. Alternatively, you can make a make an opt-out payment of $10,000,000 after a “tail” to prevent you from going down such a costly path. What is the present value of playing such a game?

a.$1,000,000

b.-$1,000,000

c.-$39,000,000

d.none of the above

 

 

 

 

70.The right but not the obligation to produce oil from one of your existing oil wells can be described as

a.a real option.

b.a stock option.

c.an interest rate option.

d.a future.

 

 

 

71.You are the owner of a natural gas well that can produce exactly (at today’s prices) $1,000,000 worth of gas per year for exactly 5 years. You also know (with certainty) that the correct discount rate for these revenues is 10%. An oil and gas production firm offers you $5,000,000 today for the natural gas well. What is the implied value of the real option to not produce or not to produce natural gas?

a.$0

b.$604,607

c.$1,209,213

d.$2,418,426

 

 

 

 

72.The going rate for paying a CEO in the widget industry is $1,000,000 per year. You find that the CEO of MasterWidgets has a contract that pays him $1,200,000 per year for five years if he cannot work for any other firm (for any reason during the contractual period). What is the value of a real option for a CEO to not work for a firm other than MasterWidgets? Assume a discount rate of 10%.

a.$181,818

b.$200,000

c.$758,157

d.$1,000,000