next year, boom or bust, and these two states are equally likely to occur. An asset you may invest in has a payoff forecast of b160 million in the boom state and £64 million in the bust state. The risk-free rate is 20% and a risk premium of 20% is required for assets with similar risk features. What is the maximum price you would agree to pay for this asset today?

next year, boom or bust, and these two states are equally likely to occur. An asset you may invest in has a payoff forecast of b160 million in the boom state and £64 million in the bust state. The risk-free rate is 20% and a risk premium of 20% is required for assets with similar risk features. What is the maximum price you would agree to pay for this asset today?

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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A project costing $100 will produce perpetual net cash flows that have an annual volatility of 35% with no expected growth. If the project existed, net cash flows today would be $8. The project beta is 0.5, the effective annual risk-free rate is 5%, and the effective annual risk premium on the market is 8%. What is the static NPV of the project? What would you pay to acquire the rights to this project if investment rights lasted only 3 years? What would you pay to acquire perpetual investment rights?
Consider the following two alternatives. The planning period is 8 years for both alternatives. The first alternative requires an initial investment of 200,000 TL and it will produce annual earnings of 53,000 TL for 8 years. The market value will be 0 TL at the end of the planning horizon. The second alternative requires an initial investment of 150,000 TL and it will produce annual earnings of 40,000 TL for 8 years. And the market value at the end of the planning horizon will be 20,000 TL for this alternative. The MARR is 20%. Determine which alternative is better using the incremental IRR method and interpolation to calculate IRR.
An investment advisor has recommended a R50,000 portfolio containing assets R, J, and K; R25,000 will be invested in asset R, with an expected annual return of 12 percent; R10,000 will be invested in asset J, with an expected annual return of 18 percent; and R15,000 will be invested in asset K, with an expected annual return of 8 percent. What is the expected annual return of this portfolio? What is the correct answer? A. 12.01% B. 12.00% C. 11.98% D. 12.93%
A project has two possible outcomes. The good outcome returns $9,000 next year and occurs 59% of the time. The bad outcome is total failure, retuming $0 , the rest of the time. If the risk free interest rate is 3.2% , the expected market return is 12.6% , and the project beta is 1.1 , what is the price of the project today?
5. Suppose you are evaluating the following potential investment project: Spend $34 million today on a factory in Alabama that will be completed in 1 year. You expect to receive $12 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Toyhonda, a Japanese competitor, for a further $30 million. The market interest rate is 9%. (Assume the inflation rate is constant at 0, and is expected to remain so for the duration of the above investments.) Would this plan generate profits enough to cover the investment cost? Yes b. No c. break-even (i.e., no profit nor loss) a.
I had an investment opportunity that requires an initial investment of GH¢5000 today and will pay GH¢6000 on a year's time. So if i had an alternative imvestment with similar risk of 25%, should i invest??
A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following: What is the PV of the project? What is the certainty-equivalent cash flow in year 1 and year 2? What is the ratio of the certainty-equivalent cash flows to the expected cash?
You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 %, and an expected growth rate of 5% after 2003. Calculate the NPV, IRR, Payback Period. Explain how do you determining the initial cost and the terminal value? (Using Gordon Model to find the terminal)
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Raysut cement has taken up a new project with an initial investment of 125000 OMR.The expected future cashflow from the project over the next three years will be 57000 OMR, 55000 OMR and 65000 OMR.What is the profitability index if the discount rate is 15 percent? Select one: a. 1.04 b. 1.23 c. 1.12 d. None of these e. 1.07
A project has an expected risky cash flow of RM 500, in year 3. The risk-free rate is 4%, the market rate of return is 14%, and the project’s beta is 1.2. Calculate the certainty equivalent cash flow for year 3.
4

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