Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 11, Problem 4QP
Sensitivity Analysis [LO1] For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern? Describe how you would calculate your answer. What values would you use for the other
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
If a firm is planning for an international project, the manager should understand that the project's NPV would be ______ by the size of the initial investment and the project's required rate of return.
A.
positively; negatively
B.
positively; positively
C.
negatively; negatively
D.
negatively; positively
Consider two investment opportunities A and B.
Investment A:
Expected return = 0.08, Standard deviation = 0.06
Investment B:
Expected return = 0.24, Standard deviation = 0.08
Which investment would you choose A or B? Provide the rationale behind your decision.
b. If company is selecting projects with the negative NPV, what impact this decision would
have on the share price of the company
c. While forecasting future sales, internal sales forecast is more appropriate or external sales
forecast?
d. Why are dividends the basis for the valuation of common stock?
e. When the constant growth dividend valuation model is used to explain a stock's current
price, the quantity (ke - g) represents the expected dividend yield. Is this statement right
or wrong? Explain.
1. The Net Present Value decision technique may not be the only pertinent unit of measure if
the firm is facing
A. a labor union.
B. a major investment.
C. time or resource constraints.
D. the election of a new board of directors.
2. Which rate-based decision statistic measures the rate of return, including the cost of capital
for a project?
A. Profitability Index, PI
B. Net Present Value, NPV
C. Internal Rate of Return, IRR
D. Modified Internal Rate of Return, MIRR
3. When looking at these types of projects, one must consider any cash flows that arise from
installing the new equipment.
A. new
B. cost-cutting
C. incremental
D. replacement
E. all of the above.
4. Of the capital budgeting techniques discussed, which works equally well with normal and
non-normal cash flows and with independent and mutually exclusive project?
A. payback period
B. net present value
C. discounted payback period
D. modified internal rate of return
5. The approach to convert an infinite series of asset…
Chapter 11 Solutions
Fundamentals of Corporate Finance
Ch. 11.1 - Prob. 11.1ACQCh. 11.1 - What are some potential sources of value in a new...Ch. 11.2 - Prob. 11.2ACQCh. 11.2 - What are the drawbacks to the various types of...Ch. 11.3 - How are fixed costs similar to sunk costs?Ch. 11.3 - What is net income at the accounting break-even...Ch. 11.3 - Why might a financial manager be interested in the...Ch. 11.4 - If a project breaks even on an accounting basis,...Ch. 11.4 - If a project breaks even on a cash basis, what is...Ch. 11.4 - Prob. 11.4CCQ
Ch. 11.5 - What is operating leverage?Ch. 11.5 - How is operating leverage measured?Ch. 11.5 - Prob. 11.5CCQCh. 11.6 - What is capital rationing? What types are there?Ch. 11.6 - Prob. 11.6BCQCh. 11 - Prob. 11.1CTFCh. 11 - Marcos Entertainment expects to sell 84,000...Ch. 11 - Delta Tool has projected sales of 8,500 units at a...Ch. 11 - What is true for a project if that project is...Ch. 11 - A capital-intensive project is one that has a...Ch. 11 - Pavloki, Inc., has three proposed projects with...Ch. 11 - Forecasting Risk [LO1] What is forecasting risk?...Ch. 11 - Sensitivity Analysis and Scenario Analysis [LO1,...Ch. 11 - Prob. 3CRCTCh. 11 - Operating Leverage [LO4] At one time at least,...Ch. 11 - Operating Leverage [LO4] Airlines offer an example...Ch. 11 - Prob. 6CRCTCh. 11 - Prob. 7CRCTCh. 11 - Prob. 8CRCTCh. 11 - Prob. 9CRCTCh. 11 - Scenario Analysis [LO2] You are at work when a...Ch. 11 - Calculating Costs and Break-Even [LO3] Night...Ch. 11 - Prob. 2QPCh. 11 - Scenario Analysis [LO2] Sloan Transmissions, Inc.,...Ch. 11 - Sensitivity Analysis [LO1] For the company in the...Ch. 11 - Sensitivity Analysis and Break-Even [LO1, 3] We...Ch. 11 - Prob. 6QPCh. 11 - Prob. 7QPCh. 11 - Calculating Break-Even [LO3] In each of the...Ch. 11 - Calculating Break-Even [LO3] A project has the...Ch. 11 - Using Break-Even Analysis [LO3] Consider a project...Ch. 11 - Calculating Operating Leverage [LO4] At an output...Ch. 11 - Leverage [LO4] In the previous problem, suppose...Ch. 11 - Operating Cash Flow and Leverage [LO4] A proposed...Ch. 11 - Cash Flow and Leverage [LO4] At an output level of...Ch. 11 - Prob. 15QPCh. 11 - Prob. 16QPCh. 11 - Sensitivity Analysis [LO1] Consider a four-year...Ch. 11 - Operating Leverage [LO4] In the previous problem,...Ch. 11 - Project Analysis [LO1, 2, 3, 4] You are...Ch. 11 - Project Analysis [LO1, 2] McGilla Golf has decided...Ch. 11 - Prob. 21QPCh. 11 - Sensitivity Analysis [LO1] McGilla Golf would like...Ch. 11 - Break-Even Analysis [LO3] Hybrid cars are touted...Ch. 11 - Break-Even Analysis [LO3] In an effort to capture...Ch. 11 - Prob. 25QPCh. 11 - Operating Leverage and Taxes [LO4] Show that if we...Ch. 11 - Scenario Analysis [LO2] Consider a project to...Ch. 11 - Sensitivity Analysis [LO1] In Problem 27, suppose...Ch. 11 - Prob. 29QPCh. 11 - Prob. 30QP
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Industry is evaluating two different manufacturing systems (Alpha and Beta): Possible Outcome Probability Rate of Return Alpha System Rate of Return Beta System Optimistic .35 .40 .15 Most likely .45 .25 .30 Pessimistic .20 (.10) (.20) Which manufacturing system provides the lowest expected return? why? Alpha System Beta System Not enough informationarrow_forward3. Do you think that the behavior of real world managers is always consistent with profit maximization goal?arrow_forwardManagement has constructed the below table of estimates reflecting the possible returns and probabilities for pessimistic, most likely and optimistic results. Possible outcomes probability return(n$) Pessimistic 0.4 14.00 Most likely 0.2 34.00 Optimistic 0.4 6.00 a) Determine the expected value of return for the above company b) What is the risk involved if the company chooses to invest in the above opportunity?arrow_forward
- 6. Sensitivity and scenario analysis Different techniques for analyzing project risk require different input variables and assumptions. Suppose you are using the sensitivity analysis technique to evaluate project risk. You would change in the model to evaluate the effect of the input factors on the expected value. one input variable at a time several input variables together Zeva is a risk analyst. She is conducting a sensitivity analysis to evaluate the riskiness of a new project that her company is considering investing in. Her risk analysis report includes the sensitivity curve shown on the graph. NPV (Millions of dollars) Base Case NPV Base Case Price -30 -24 -18 -12 -6 0 6 12 18 24 30 CHANGES IN SELLING PRICE (Percent) This curve implies that the project is very sensitive to changes in the price of the product. The project's NPV is likely to become negative if the price for which the product can be sold decreases byarrow_forwardWhich statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptablearrow_forwardQuestion 6 Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? O Payback O Profitability index O Net present value O Internal rate of return O Discounted paybackarrow_forward
- Which one of the following methods predicts the amount by which the market value of a firm will change if a project is accepted? Multiple Choice Internal rate of return Payback Net present value Profitability index Discounted paybackarrow_forwardSolve this problemarrow_forwardH5. Distinguish between active and passive investment management styles. What are the advantages of each approach? Which approach would a proponent of an efficient market tend to use? Why? Explain with detailsarrow_forward
- Why is profitability analysis necessary, with a particular emphasis on return on investment? When considering your answer, consider the ROI breakdown.arrow_forwardGet Answer with Explanationarrow_forwardWhat term refers to the uncertainty inherent in projections of future ROIC? (15-3)Firms with relatively high nonfinancial fixed costs are said to have a high degree of what? (15-4)“One type of leverage affects both EBIT and EPS. The other type affects only EPS.” Explain this statement.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License