A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $2,100 an ounce, but th price is extremely volatile and could fall as low as $2,000 or rise as high as $2,200 in the next month. The company will pring 1,400 ounces of gold to the market next month. a. What will be the total revenues if the firm remains unhedged for gold prices of (1) $2,000, (i) $2,100, and (ii) $2,200 an punce? 1. At $2,000 an ounce i. At $2,100 an ounce iii. At $2,200 an ounce o. The futures price of gold for delivery 1 month ahead is $2,090. What will be the firm's total revenues if the firm enters nto a 1-month futures contract to deliver 1,400 ounces of gold? Total revenues

A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $2,100 an ounce, but th price is extremely volatile and could fall as low as $2,000 or rise as high as $2,200 in the next month. The company will pring 1,400 ounces of gold to the market next month. a. What will be the total revenues if the firm remains unhedged for gold prices of (1) $2,000, (i) $2,100, and (ii) $2,200 an punce? 1. At $2,000 an ounce i. At $2,100 an ounce iii. At $2,200 an ounce o. The futures price of gold for delivery 1 month ahead is $2,090. What will be the firm's total revenues if the firm enters nto a 1-month futures contract to deliver 1,400 ounces of gold? Total revenues

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The current price of gold is $400. The risk-free rate is 10% and the annual volatility for changes in gold prices is 30%. Gold prices are assumed to follow a lognormal distribution. Each year the mine is open a fixed cost of $1 million is incurred. This cost is incurred even if no gold is mined during the year. If we open (or re-open) the mine a cost of $2 million is incurred. If we shut the mine a fixed cost of $1.5 million is incurred. During the current year and each of the next 15 years we can, if the mine is open, mine up to 10,000 ounces of gold at a variable cost of $250 per ounce. What is the worth of this situation? Assume the mine is open at the beginning of year 1.
Birkenstock is considering an investment in a nylon-knitting machine. The machine requires an initial investment of $27,300, has a five-year life, and has no residual value after five years. The company's cost of capital is 10.41%. The company has estimated expected cash inflows for three scenarios: pessimistic, most likely, and optimistic. These expected cash inflows are listed in the following table. Calculate the range for the NPV across the three scenarios. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 1 2 3 4 5 Pessimistic $6,720 7,180 8,680 7,770 5.800 Expected cash inflows Most likely $9,240 10,150 11,790 10,740 7.840 Optimistic $11,830 13,260 15,800 12,790 8.780
Brett Collins is reviewing his company's investment in a cement plant. The company paid $16,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Expected Actual Year 1 $3,310,000 2,600,000 Required Year 2 $5,090,000 2,980,000 Year 3 $4,560,000 4,860,000 Year 4 $5,090,000 3,810,000 Year 5 $4,290,000 3,540,000 a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. Note: Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to the nearest whole dollar.
ABC mines copper with fixed costs of $0.50/lb and variable cost of $0.40/lb. The 1-year forward price of copper is $1/lb. The 1-year continuously compounded interest rate is 6%. If ABC does nothing to hedge copper price risk, what is its profit 1 year from now (per pound of copper)? If, on the other hand, ABC sells forward its expected copper production, what is its estimated 1-yearprofit from now? In both scenarios, assume the spot price of copper in 1 year can be $0.80, $0.90, $1.00, $1.10, and $1.20. 2) Compute ABC’s estimated profit in 1 year if it buys a put option with a strike of $1.00 and a premium of $0.04. Assume the spot price of copper in 1 year can be $0.80, $0.90, $1.00, $1.10, and $1.20.
Brett Collins is reviewing his company's investment in a cement plant. The company paid $15.500,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Expected Actual Year 1 $3,380,000 2,700,000 Year 2 $4,950,000 3,060,000 Net present value (expected) Net present value (actual) Year 3 $4,580,000 4,900,000 Year 4 $5,040,000 Year 5 $4,250,000 3,860,000 3,530,000 Required a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. Note: Negative amounts should be Indicated by a minus sign. Round your Intermediate calculations and final answers to the nearest whole dollar.
WOPPERS PLC, which currently has negligible cash holdings, expects to have to make a series of cash payments totalling $3 000 000 over the forthcoming year. These will become due at a steady rate and can be met by making periodic sales from existing holdings of short-term securities. According to the company’s financial advisors, the most likely average percentage rate of return on these securities is 9% over the forthcoming year, although this estimate is highly uncertain. Whenever the company sells securities, it incurs a transaction fee (T) of $50. Calculate the optimal cash balance for the company What is the optimal number of times Welders should sell securities? . Determine the cost of holding cash resulting from this policy.
Oil is selling at a spot price of $41.98 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 0.5% per month. What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $42.62 per barrel, instead of hedging with a forward contract?
Modern Artifacts can produce keepsakes that will be sold for $280 each. Nondepreciation fixed costs are $5, 000 per year, and variable costs are $260 per unit. The initial investment of $13,000 will be depreciated straight-line over its useful life of five years to a final value of zero, and the discount rate is 10%. What is the accounting break-even level of sales if the firm pays no taxes? What is the NPV break-even level of sales if the firm pays no taxes? Note: Do not round intermediate calculations. Round your final answer to the nearest whole number. What is the accounting break-even level of sales if the firm's tax rate is 20%? What is the NPV break-even level of sales if the firm's tax rate is 20%? Note: Do not round intermediate calculations. Round your final answer to the nearest whole number. What is the degree of operating leverage for the firm for the NPV break-even points when the tax rate is 0% and when the tax rate is 20%? Note: Round intermediate calculation to the…
Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.49 million per year, growing at a rate of 2.3% per year. Goodyear has an equity cost of capital of 8.6%, a debt cost of capital of 6.7%, a marginal corporate tax rate of 34%, and a debt-equity ratio of 2.4. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable? A divestiture would be profitable if Goodyear received more than $ million after tax. (Round to one decimal place.)
A mine is for sale for $240,000. It is believed that the mine will produce a profit of $65,000 the first year, but the profit will decline by $5,000 a year after that, eventually reaching zero, whereupon the mine will be worthless. What rate of return would this $240,000 investment produce for the purchaser of the mine?
The price of gold is currently $1700 per ounce. The forward price for delivery in one year is $1800. An arbitrageur can borrow money at 5% per annum. What should the arbitrageur do? Assume that the cost of storing gold is zero and that gold provides no income.
Veggie Burgers, Inc. would like to maintain its cash account at a minimum level of $247,000 but expects the standard deviation in net daily cash flows to be $12,200, the effective annual rate on marketable securities to be 4.9 percent per year, and the trading cost per sale or purchase of marketable securities to be $28.50 per transaction. What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations. Round your answer to 2 decimal places.) Optimal cash return point

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