Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate? O The company's shareholders will never consider investing in the project since its expected NPV is negative O The company's shareholders should invest in the project since its expected NPV is positive O Undertaking the project reduces bankruptcy risks O The shareholders of the company are likely to undertake the project because all the downside risk is borne by creditors

Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate? O The company's shareholders will never consider investing in the project since its expected NPV is negative O The company's shareholders should invest in the project since its expected NPV is positive O Undertaking the project reduces bankruptcy risks O The shareholders of the company are likely to undertake the project because all the downside risk is borne by creditors

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 7MC

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Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate? The company's shareholders will never consider investing in the project since its expected NPV is negative The company's shareholders should invest in the project since its expected NPV is positive Undertaking the project reduces bankruptcy risks The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors
A software company Future PLC can invest in either Project C orProject D which have the same initial Year = 0 cost of £275mlm and cash-flows: Project C: £150mln (in Year=1), £250mln (in Year=2)Project D: perpetuity of £25mln (in Year=1) growing at an annual rateof g=7% The problem is, that the firm does not know the risk-adjusted discount rateof Project C but it does know that the cash flow betas are 55 (in Year=1) and 85 (in Year=2). It also knows that Project D has the same risk as a market portfolio, which has an annual return of rm = 15%. Risk-free treasury bonds have an annual return of rf = 5%. Which project should be chosen by the firm?
At the present time, t = 0, your company has assets-in-place and $200m in cash. One period from now, t=1, assets-in-place will have a value of $600m, with probability 1/2, and $200m, with probability 1/2. The beta of these assets is zero. Your company also has an outstanding debt with face value $400m, due at t=1. The company has an investment project; that requires at t=0 an investment of $160m and will have a certain payoff of $200m at t=1. The risk-free rate is zero, and there are no taxes. a) Should your company take the project? b) Discuss how your answer would change if you finance this project with secured debt.
A company has an investment project that would cost$10 million today and yield a payoff of $15 million in4 years.a. Should the firm undertake the project if theinterest rate is 11 percent? 10 percent? 9 percent?8 percent?b. Can you figure out the exact interest rate atwhich the firm would be indifferent betweenundertaking and forgoing the project? (Thisinterest rate is called the project’s internal rate ofreturn.)
*A project costs $298 at t = 0 and generates unlevered after-tax cash flows of $53 per year forever. The project's unlevered cost of capital is 11.9%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $87 and will earn interest at 4.8% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 15% . What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1 % . correct answer: 11.6
A company is considering investing in a project whose present value without flexibility is 100 million. The project pays no dividends, and the initial investment required is 102 million. The appropriate cost of capital for the project is 20%. The risk-free rate is 5%. Every period the project cash flows either go up by a factor "u", or reduces by a factor "d". Use u = 2.2255 and d% = %3D 0.4493. a) Calculate the NPV of the project without the flexibility. b) Suppose the total investment of 102 million (present value) may be disaggregated into 3 installments, as follows: 52 million in year 0, 21 million in year 1, and 33.075 million in year 2. In any year management has the option to "default" on its planned investment, at which point the project is terminated. What is the NPV for the project with this default option? c) What is the value of this default option?
Marites Company is considering a 5-year project. The company plans to invest P900,000 now and it forecasts cash flows for each year of P270,000. The company requires that investments yield a discount rate of at least 14%. Calculate the internal rate of return to determine whether it should accept this project. Group of answer choices A. The project should be rejected because it will not earn exactly 14%. B. The project should be rejected because it will earn less than 14%. C. The project should be accepted because it will earn more than 10%. D. The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected. E. The project should be accepted because it will earn more than 14%.
Suppose that Duc - ee's Ltd. has no cash in hand. The firm instead can issue a financial claim priced $10 million today that promises to pay investors $11 million in one year. How much is the project worth, net of the cost, in terms of the present value today (in $ million, rounded to 3 decimal places)?
I am considering a project with free cash flows in one year of €200,000 or €250,000 with equal probability. The cost of the project is $180,000. The project’s cost of capital is 12% and the risk-free rate is 4%. What is the NPV of the project? If the project is financed by all equity, what is the initial market value of the unlevered equity? If the project is financed with 50% debt (at the risk-free rate), what is the expected return on the levered equity?
Your firm is considering a project with the following cash flows: You learn that the firm can abandon the project, if it so chooses, after 1 year of operation,in which case it can sell the asset and receive $15,000 in cash at the end of Year 2. Assumethat all cash flows are after-tax amounts. The WACC is 12%.a. What is the project’s expected NPV without the abandonment option?b. What is the expected NPV with the abandonment option?c. What is the value of the abandonment option?
A project costs $334 at t = 0 and generates unlevered after - tax cash flows of $51 per year forever. The project's unlevered cost of capital is 9.1%. The initial cost of the project is paid for with a combination of debt and equity. Debt contributes $72 and will earn interest at 5.4% forever. (The debt is perpetual, it never matures. Assume the debt tax shield cash flows have the same risk profile as the debt cash flows. The debt is fairly priced. All of the project NPV accrues to the equity holders.) The tax rate is 27%. What is the WACC of the levered project? Give your answer in percentage to the nearest 0.1%.
1. A company is considering investing in a project. The future perpetual cash flow is either $750K if the market goes up or $125K if the market goes down next year. The objective probability the market will go up is 20%. The appropriate risk-adjusted rate of return (cost of capital) is 25%. The initial capital investment required at time 0 is $1200K. а. Should the company invest in this project? b. Upon closer inspection the CFO realizes the company actually has some flexibility in managing this project. Specifically, if the market goes down, the company can abandon the project, and liquidate its original capital investment for 75% of its original value. If, however, the market should go up, the company could expand operations, which would result in twice the original PV of the cash flows. To expand the company will have to make an additional capital expenditure of $800K. The CFO wants to know if the company should now proceed with the project with the added flexibilities, and asks…