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 11, Problem 8PS
Market prices Suppose the current price of gold is $1,200 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. What is the
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Suppose the current price of gold is $1,300 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will fall to a long-run trend of 4% per year. Assume that gold prices have a beta of 0 and that the risk-free rate is 5.5%. What is the present value of 1.5 million ounces of gold produced in 8 years? (Do not round intermediate calculations. Enter your answer in billions rounded to 2 decimal places.)
Suppose the current price of gold is $1,240 an ounce. Hotshot Consultants advises you that gold prices will increase at an average
rate of 14% for the next two years. After that the growth rate will fall to a long-run trend of 2% per year. Assume that gold prices have a
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intermediate calculations. Enter your answer in billions rounded to 2 decimal places.)
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Chapter 11 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 2PSCh. 11 - Prob. 3PSCh. 11 - Prob. 4PSCh. 11 - Prob. 5PSCh. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 9PSCh. 11 - Economic rents Thanks to acquisition of a key...
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- Mexican Motors’ market cap is 250 billion pesos. Next year’s free cash flow is 9.5 billion pesos. Security analysts are forecasting that free cash flow will grow by 8.50% per year for the next five years.a. Assume that the 8.50% growth rate is expected to continue forever. What rate of return are investors expecting? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b-1. Mexican Motors has generally earned about 13% on book equity (ROE = 13%) and reinvested 50% of earnings. The remaining 50% of earnings has gone to free cash flow. Suppose the company maintains the same ROE and investment rate for the long run. What will be the growth rate of earnings? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal places.) b-2. What would be the rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardYour consulting firm will produce cash flows of $145,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 6.9%, and you anticipate inflation of about 2.9%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value $ Present value 279,013.75 b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places.arrow_forwardYour consulting firm will produce cash flows of $190,000 this year, and you expect cash flows thereafter to keep pace with any increase in the general level of prices. The interest rate currently is 5.2%, and you anticipate inflation of about 1.2%. a. What is the present value of your firm's cash flows for years 1 through 5? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present value b. How would your answer to (a) change if you anticipated no growth in cash flow? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Present valuearrow_forward
- market has an expected return of 9% per year with a standard deviation of 25%. You have designed a financial asset that will only pay out money if the market return i between 0% and 30%. The probability the asset will pay out money isarrow_forwardPlease solve using excel and explain formulas.arrow_forwardCalculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk - free rate is 2.0%, and the market risk premium is 8.0%. Mudd has a beta of 1.7, and its realized rate of return has averaged 15.0% over the past 5 years. Round your answer to two decimal places.arrow_forward
- An investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year? Please show how to solve this by using Excel, thank you.arrow_forwardSteven Hocky (SH) is expected to generate free cash flow next year of 200. After next year, SH's cash flows are expected to grow at 4% per year forever. SH has an asset beta of 1, a debt beta of 0.1, and a D/V ratio of 0.2. The risk-free rate is 2% and the market risk premium is 6%. What is the current value of Steven Hocky?arrow_forwardA financial services product is offered to you. It pays you $50,000 one year from today if the S&P 500 goes up over the year and $100,000 is the S&P 500 goes down over the year (note: the payouts are switched up from the previous question). You believe the probability of the market going up and the market going down are 50% and 50%, respectively. The risk free rate is 0% and the MRP is 5%, what is the fair value of this investment today? We need more information to choose between the answers. Less than $75,000 $75,000 exactly More than $75,000arrow_forward
- Assume a firm buys a new machine this year at a cost of $12,600 that will lead to savings of $6,600 after one year, $4,840 more after the second year and another $4,000 after the third year. Then the machine will become obsolete and no further savings will accrue. Is this a worthwhile investment if we assume that there is no inflation and that the market rate of interest remains at i = 10% over the three year period?arrow_forwardCurrent stock price of XYZ is $1,000. The market expects the price will be $1,700 in 3 years. What should be the return over the next two years if return is continuously compounded?arrow_forwardAn oil company executive is considering investing $11.1 million in one or both of two wells: well 1 is expected to produce oil worth $3.11 million a year for 10 years; well 2 is expected to produce $2.11 million for 15 years. These are real (inflation-adjusted) cash flows.The beta for producing wells is 0.88. The market risk premium is 6%, the nominal risk-free interest rate is 7%, and expected inflation is 2%.The two wells are intended to develop a previously discovered oil field. Unfortunately there is still a 18% chance of a dry hole in each case. A dry hole means zero cash flows and a complete loss of the $11.1 million investment.Ignore taxes and make further assumptions as necessary.a. What is the correct real discount rate for cash flows from developed wells? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Real discount rate % b. The oil company executive proposes to add 20 percentage points to the…arrow_forward
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