following risky scenarios for future cash flows for a firm: Project 1 Probability Cash Flow ($) 2 6 2 4,000 5,000 6,000 Project 2 Probability 14 2 Cash Flow ($) 0 5,000 10,000 Given that the firm has fixed debt payments of $8,000 and limited liability, which scenario will shareholders choose and why? How would your answer change if there were not limited liability?

following risky scenarios for future cash flows for a firm: Project 1 Probability Cash Flow ($) 2 6 2 4,000 5,000 6,000 Project 2 Probability 14 2 Cash Flow ($) 0 5,000 10,000 Given that the firm has fixed debt payments of $8,000 and limited liability, which scenario will shareholders choose and why? How would your answer change if there were not limited liability?

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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6. The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debr, preferred stock, and common equity the firm plans to raise funds for Its future projects. The target proportions of debt, preferred stock, and commonequity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained eamingsis used in the firm's WACC calcuation, However, If the fiem wil have to issue new common stock, the cost of new common stock should be used in the firm's WACC calculation. Quantitative Problem: Barton Industries expects that its tarpet capital structure for raising funds in the fubare for its capital budget wll consist of 40% debt, 5% preferred stock, and 55% common equity.Note that the firm's marginal tex rate is 25%. Assume that the firm's cost of debt, fe is 8.9%, the fem's cont of preferred stock, r is 8.1% and…
Suppose the management of a firm is trying to allocate liquid assets to two accounts, one of which is riskless but pays no interest, while the other offers a risky return. Assume the rate of return r on the second account is uniformly distributed over the range [-0.5, 0.5]. Let R denote the amount currently available for allocation to the two accounts, and S denote the amount invested in the risky asset. Suppose management would like to make the next period investment value as large as possible but subject to the condition that R + Sr not fall below 95% of the original value of R too often so that if the investment falls below 95% of its original value, it should not do so more than 25% of the time. Calculate the ratio of investment and the amount available, that is, a = R
Suppose an investment has conventional cash flows with positive NPV. How would it impact your decision based on capital budgeting techniques mentioned below? Proﬁtability index (PI) Internal Rate of Return (IRR) Payback Period (PBP) Ratio 2020 2019 2018 2020- Industry Average Inventory Turnover 62.65 42.42 32.25 53.25 Receivables in days 94 63 50 115 Debt to Equity 0.75 0.85 0.90 0.88 Quick Ratio 1.028 1.03 1.029 1.031 Current Ratio 1.33 1.21 1.15 1.25
Hello This is for the next part, can you help with question 3. First picture is question, the second picture shows the solution that i cant figure out
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A risky $420,000 investment is expected to generate the following cash flows: Year 1 2 3 4$ 102,700 $ 163,030 $ 160,824 $ 135,200 If the firm’s cost of capital is 12 percent, should the investment be made?. Use a minus sign to enter a negative value, if any. Round your answer to the nearest dollar.NPV: $ Should The investment be made? An alternative use for the $420,000 is a four-year U.S. Treasury bond that pays $25,200 annually and repays the $420,000 at maturity. Management believes that the cash inflows from the risky investment are equivalent to only 70 percent of the certain investment, which pays 6 percent. Should the investment be made? Use Appendix B to answer the question. Do not round other intermediate calculations. NPV: $ Should The investment be made?
A firm's cost of capital indicates [Select] A firm must earn [Select] provided. the risk of the firm's assets. to compensate investors for the financing they hav The required return for a firm is the same as [Select]
If interaction effects make it difficult for a firm to adjust its capital structure based on prevailing conditions, then Group of answer choices the firm should use as much debt financing as possible when it is financially healthy in order to benefit from lower corporate taxes the firm should target a 50% debt/50% equity capital structure the firm should choose the capital structure that will minimize all transaction costs--both direct and indirect the firm should use more equity financing than is necessarily optimal today
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2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-C
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If you solve for what fraction of your wealth (y) you should invest in the risky asset and you get the answer of 1.4, what does this mean? Assume you can borrow at the risk free rate. a) That you should invest 100% of your wealth in the risky asset b) That you should invest 140% of your wealth in the risky asset by borrowing at the risk free rate c) That you should short 140% of the risky asset and invest in the risk free asset d) That you should invest somewhere between 100% and 140% of your wealth in the risky asset by borrowing at the risk free rate.

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