EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 11, Problem 20P
a)
Summary Introduction
To determine: The contribution that this project makes to firm’s value after considering riskiness of projected returns (
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You are considering opening a new plant. The plant will cost $100.0 million upfront. After that, it is expected to produce profits of $30.0 million at the end of every year.
The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.0%. Should you make the investment? Calculate
the IRR. Use the IRR to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
You currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows.
Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate.
(d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim the cash you have invested outside of the project. What is the face value of the loan and the interest rate? How much money do you expect to have one year from now?
(e) In light of your numerical answers above, discuss Modigliani and Miller's 1st proposition.
Your firm has a risk-free investment opportunity with an initial investment of $162,000 today and receive $175,000 in one year. For what level of interest rates is this project attractive? The project will be attractive when the interest rate is any positive value less than or equal to _______% ?
Chapter 11 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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