Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 10, Problem 21PS
Summary Introduction
To determine: The real option in the following cases.
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The company is considering
hedging its copper
production. It thinks that prices
are highly likely
to rise in the near future, it should
a buy itm puts
b buy otm puts
c sell otm calls
d do nothing
Garcia Real Estate is involved in commercial real estate ventures throughout the United States, Some of these ventures are much riskier than other
ventures because of market conditions in different regions of the country.
If Garcia does not risk-adjust its discount rate for specific ventures properly, which of the following is likely to occur over time? Check all that apply.
The firm could potentially reject projects that provide a higher rate of return than the company should require.
The firm will increase in value.
The firm's overall risk level will increase.
How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project?
Quantitatively
O Subjectively
Consider the case of another company. Turnkey Printing is evaluating two mutually exclusive projects. They both require a $5 million investment today
and have expected NPVS of $1,000,000. Management conducted a full risk analysis of these two projects, and the results are shown below.…
The management recognizes that the present worth of the cogeneration plant is quite sensitive to the savings in electricity costs, the MARR, and the initial costs. Since there is some uncertainty about these estimates, the company wants to explore further the impact of changes in these parameters on the viability of the project. You are to carry out a break-even analysis for each of these parameters to find out what range of values results in a viable project (i.e., PW > 0) and to determine the “break-even” parameter values that make the present worth of the project zero. How much of a drop in the cost of natural gas will result in the heat exchange units having a present worth of zero? Construct a break-even graph to illustrate this break-even cost
Chapter 10 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10 - Capital budgeting process True or false? a. The...Ch. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Prob. 5PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 7PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PSCh. 10 - Break-even analysis Break-even calculations are...
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