Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134202648
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 22, Problem 14P
You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate that, on average, the R&D division generates two new product proposals every three years, so that there is a two-thirds chance that a project will be proposed every year. Typically, the investment opportunities the R&D division produces require an initial investment of $10 million and yield profits of $1 million per year that grow at one of three possible growth rates in perpetuity: 3%, 0%, and –3%. All three growth rates are equally likely for any given project. These opportunities are always “take it or leave it” opportunities: If they are not undertaken immediately, they disappear forever. Assume that the cost of capital will always remain at 12% per year. What is the
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You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established
company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products.
You estimate that, on average, the division launches two projects every three years, so you estimate that there is a 67%
chance that a project will be produced every year. Typically, the investment opportunities the R&D division produces
require an initial investment of $10.3 million and yield profits of $1.09 million per year that grow at one of three possible
growth rates in perpetuity: 3.3%, 0.0%, and -3.3%. All three growth rates are equally likely for any given project. These
opportunities are always "take it or leave it" opportunities: If they are not undertaken immediately, they disappear forever.
Assume that the cost of capital will always remain at 11.6% per year. What is the present value of all future growth
opportunities Big Industries…
Please answer fast I will rate for you sure....
As an analyst for Kingbird Inc., you are responsible for many firms, including ADFC. Currently you have a
"hold" recommendation on ADFC. The current price of ADFC is $154. You have conducted an extensive
analysis of the industry and you feel that the probability the firm will capture a substantial share of the new
market is 25 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a
rate of 45 percent per year for the next five years. In that case, the stock price would rise to $234 due to the
unusually high growth rate of future earnings. However, you feel there is a 35-percent probability that the
firm will face serious difficulties in the near future, in which case the stock price will fall to $114, and the
earnings growth rate will drop to 3 percent. There is a 40-percent chance that nothing will change for the
firm and its earnings growth rate will remain at 12 percent.
Calculate the expected price in the future. (Round intermediate…
Chapter 22 Solutions
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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