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Get college assignment help at uniessay writers Cherone Equipment , a manufacturer of electronic fitness equipment, wishes to evaluate two alternative plans for increasing its production capacity to meet the rapidly growing demand for its key products – the Cardiocycle. After months of investigation and analysis, the firm has pruned the list of alternatives down to the following two plans, either of which would allow it to meet its forecast product demand. Plan X – Use current proven technology to expand the existing plant and semiautomated production line. This plan is viewed as only slightly more risky than the firm’s current average level of risk. Plan Y – install new, just developed autpmatic production equipment in the exisitng plant to replace the current semiautomated production line. Beceause this plan eliminates the need to expandthe plant, it is less expensive than Plan X , but it is believed to be far more risky because of the unproven nature of the technology. Cherone, which routinely uses NPV to evaluate capital budgeting projects, has a cost of capital of 12%. Currently, the risk-free rate of interest, RF is 9%. The firm has decided to evaluate the 2 plansover a 5-year time period, at the end of which each plan would be liquidated. The relevant cahs flows associated with each plan are summarized in the following table: Plan X Plan Y Initial investment (CFo) 2,700,000 2,100,000 Year Cash flows (CFt) 1 470,000 380,000 2 610,000 700,000 3 950,000 800,000 4 970 600,000 5 1,500,000 1,200,000 The firm has determined the risk-adjusted discount rate (RADR) applicable to each plan as shown in the following table: Plan RADR X 13% Y 15% Further analysis of the 2 plans has disclosed that each has a real option embedded within irs cash flows. Plan X real option – at the end of 3 years the firm could abandon this plan and install the automatic equipment, which by then would have a proven track record. This abandonment option is expected to add $100,000 of NPV and has a 25% chance of being exercised. Plan Y Real option – Bcause plan Y doesn’t require current expansion of the plant, it creates an improved opportunity for future plant expansion. This option allows the firm to grow its business into related areas more easily if business and economic conditions continou to improve. This growth option is estimated to be worth $500,000of NPV and has a 20% chance of being exercised. TO DO: a. Assuming the 2 plans have the same risk as the firm, use the following capital budgeting techniques and the firm’s cost of capital to evaluate their acceptability and relative ranking. 1. Net present valu (NPV) 2. Internal rate of return (IRR) b. Recognizing the difference in plan risk, use the NPV method, the risk-adjusted discount rates (RADRs) and the data given earlier to evaluate the acceptability and relative ranking of the 2 plans. c. Compare and contract your findings in parts a and b. Which plan would you recommend? Did explicit recognition of the risk differences of the plans affect this recommendation? d. Use the real-options data given above for each plan to find the strategic NPV, NPV strategic for each plan. e. Compare and contract your findings in part d with those in part b. Did explicit recognition of the real options in each plan affect your recommendation? f. Would you recommendations in part a, b and d change of the firm were operating under capital rationing? Eplain.

File attached 1102

File attached 1102

An increase in a firm’s expected growth rate would normally cause

An increase in a firm’s expected growth rate would normally cause the firm’s required rate of return to

Suppose you purchase one RIO Jan 100 call contract at $5

Suppose you purchase one RIO Jan 100 call contract at $5 and write one RIO Jan 105 call contract at $2.If, at expiration, the price of a share of RIO stock is $103, your profit would be

Centennial Brewery produced revenues of 1,145,227 in 2008. It has expenses

Centennial Brewery produced revenues of 1,145,227 in 2008. It has expenses (excluding depreciation) of 812,640, depreciation of 131,335, and interest expense of 81,112. It pays a marginal tax rate of 34 percent. What is the firm’s net income after taxes?

A portfolio’s expected return is 12 %, its standard deviation is

A portfolio’s expected return is 12 %, its standard deviation is 20%, and the risk-free rate is 4%. Which one of the following would make for the greatest increase in the portfolio’s Sharpe ratio? a. An increase of 1% in expected return b. A decrease of 1% in the risk-free rate c. a decrease of 1% in its standard deviation

“Cherone Equipment , a manufacturer of electronic fitness equipment, wishes to

“Cherone Equipment , a manufacturer of electronic fitness equipment, wishes to evaluate two alternative plans for increasing its production capacity to meet the rapidly growing demand for its key products – the Cardiocycle. After months of investigation and analysis, the firm has pruned the list of alternatives down to the following two plans, either of which would allow it to meet its forecast product demand. Plan X – Use current proven technology to expand the existing plant and semiautomated production line. This plan is viewed as only slightly more risky than the firm’s current average level of risk. Plan Y – install new, just developed autpmatic production equipment in the exisitng plant to replace the current semiautomated production line. Beceause this plan eliminates the need to expandthe plant, it is less expensive than Plan X , but it is believed to be far more risky because of the unproven nature of the technology. Cherone, which routinely uses NPV to evaluate capital budgeting projects, has a cost of capital of 12%. Currently, the risk-free rate of interest, RF is 9%. The firm has decided to evaluate the 2 plansover a 5-year time period, at the end of which each plan would be liquidated. The relevant cahs flows associated with each plan are summarized in the following table: Plan X Plan Y Initial investment (CFo) 2,700,000 2,100,000 Year Cash flows (CFt) 1 470,000 380,000 2 610,000 700,000 3 950,000 800,000 4 970 600,000 5 1,500,000 1,200,000 The firm has determined the risk-adjusted discount rate (RADR) applicable to each plan as shown in the following table: Plan RADR X 13% Y 15% Further analysis of the 2 plans has disclosed that each has a real option embedded within irs cash flows. Plan X real option – at the end of 3 years the firm could abandon this plan and install the automatic equipment, which by then would have a proven track record. This abandonment option is expected to add $100,000 of NPV and has a 25% chance of being exercised. Plan Y Real option – Bcause plan Y doesn’t require current expansion of the plant, it creates an improved opportunity for future plant expansion. This option allows the firm to grow its business into related areas more easily if business and economic conditions continou to improve. This growth option is estimated to be worth $500,000of NPV and has a 20% chance of being exercised. TO DO: a. Assuming the 2 plans have the same risk as the firm, use the following capital budgeting techniques and the firm’s cost of capital to evaluate their acceptability and relative ranking. 1. Net present valu (NPV) 2. Internal rate of return (IRR) b. Recognizing the difference in plan risk, use the NPV method, the risk-adjusted discount rates (RADRs) and the data given earlier to evaluate the acceptability and relative ranking of the 2 plans. c. Compare and contract your findings in parts a and b. Which plan would you recommend? Did explicit recognition of the risk differences of the plans affect this recommendation? d. Use the real-options data given above for each plan to find the strategic NPV, NPV strategic for each plan. e. Compare and contract your findings in part d with those in part b. Did explicit recognition of the real options in each plan affect your recommendation? f. Would you recommendations in part a, b and d change of the firm were operating under capital rationing? Eplain.

Which of the following statements is true? Explain. a. It is

Which of the following statements is true? Explain. a. It is possible that the APT is valid and the CAPM is not b. It is possible that the CAPM is valid and the APT is not

You have been offered a job with an unusual bonus structure.

You have been offered a job with an unusual bonus structure. If you stay with the company,you will get an extra $20,000 every five years, starting five years from now. What is the present value of this bonus if you plan to work for the company for 20 years and the annual discount rate is 6%?

8. Cosmic Communications Inc. is planning two new issues of 25-year

8. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds. a. 4,228 b. 4,337 c. 4,448 d. 4,562 e. 4,676

The 9 percent preferred stock of New Beverages is selling for

Get college assignment help at uniessay writers The 9 percent preferred stock of New Beverages is selling for $39 a share. What is the firm’s cost of preffered stock if the tax rate is 35 percent and the par value per share is $100?

ABC Company has three divisions: A,B, and C. Division A has

ABC Company has three divisions: A,B, and C. Division A has the least risk and division C has the most risk. The firm has a before-tax cost of debt of 95 and 165 after tax cost of equity. The firm has a debt equity ratio of 405. Management has told the manager of division A that projects in his division will be assigned a discount rate that equals 805 of the firms weighted average cost of capital. What is the WACC for ABC

The 7 percent, semi-annual bonds issued by Black Water Mills mature

The 7 percent, semi-annual bonds issued by Black Water Mills mature in 9 years and have a face value of $1,000. What is the current value of one of these bonds if the market rate of return is 9.60 percent

At fenway park, home of the boston red sox, seating is

At fenway park, home of the boston red sox, seating is limited to 34000. Hence, the number of tickets issued is fixed at that figure

A portfolio generates an annual return of 13%, a beta of

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk free rate is 5%?

A treasury bond that matures in 10 years has a yield

A treasury bond that matures in 10 years has a yield of 5.5%. A 10-year corporate bond has a yield of 7.25%. What is the default risk premium on the corporate bond?

Suppose a stock had an initial price of $71 per share,

Suppose a stock had an initial price of $71 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $82. Compute the percentage total return.

Find the yield to maturity for a $1000 par bond that

Find the yield to maturity for a $1000 par bond that matures in 6 years. The coupon rate is 6.5%, interest is paid semi-annually, and the current price of the bond is $1030.

Assume the market’s risk premium (excess return over the risk-free rate)

Assume the market’s risk premium (excess return over the risk-free rate) over the past 5 years was 8% while its standard deviation of returns was 13%. The risk-free rate was 2%. You had $10,000 to invest, and borrowed an additional $4,000 at the risk-free rate to invest in the market portfolio. a) What return and standard deviation of returns did you earn?

You are considering investing in Stock ABC and in Stock XYZ.

You are considering investing in Stock ABC and in Stock XYZ. The expected return and standard deviation of returns on ABC is 5% and 7%, respectively. The expected return and standard deviation of returns on XYZ 10% and 12%, respectively. The correlation of returns between the two stocks is -1. a) At what weighting of the two stocks will the risk of the portfolio be totally eliminated? (5 marks) b) Determine the expected return and expected standard deviation of returns of a portfolio composed of 25% ABC/ 75% XYZ and 75% ABC / 25% XYZ. (10 marks) c) Draw a properly labelled graph of the attainable portfolios and indicate on that graph which part represents the efficient frontier. Assume the market’s risk premium (excess return over the risk-free rate) over the past 5 years was 8% while its standard deviation of returns was 13%. The risk-free rate was 2%. You had $10,000 to invest, and borrowed an additional $4,000 at the risk-free rate to invest in the market portfolio. a) What return and standard deviation of returns did you earn? b) Draw a properly labelled graph of the Capital Market Line and indicate your portfolio’s return and risk on the graph. (5 marks) c) Compare the performance of a portfolio that returned 9% with a standard deviation of 12% over the same period. Did the portfolio outperform the market? (Hint: The Sharpe Ratio is required.)

on October 1,2005, Hawkeye Company sold 100000 gallons of heating oil

on October 1,2005, Hawkeye Company sold 100000 gallons of heating oil to Johnson Co . at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2005, and the remaining 50000 gallons were delivered on January 15,2006. Payments terms were : 50% due on October 1,2005, 25% due on first delivery,and the remaining 25% due on second delivery

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