Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
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
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
←
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 Plus MyLab Finance with Pearson eText -- Access Card Package (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...
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
- Suppose you are the financial manager of a large national food processing firm. In your travels, you run across a small regional food processor that you believe will provide your firm with annual returns of over 30%. Returns on your firm’s typical investments are around 20%. Should you propose that your firm acquire this regional food processor? What factors need to be considered in this decision?arrow_forwardAn office building is currently for sale, and you are thinking of purchasing it. From your extensive market research and knowledge, you know the net operating income for this year is $315,000. You expect the net operating income will grow by 7% in the first five years, 5% in the subsequent five years, and 3.5% for every year after. If you are considering an 18-year investment window and desire a 16% rate of return, how much should you pay for the building?arrow_forwardYou are the owner of a large data-services firm and are deciding on the purchase of a new hardwarecooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. Theinstallation of this cooling system will cost $3,000,000. Additionally, O&M expenditures for the collingsystem are expected to be $2,120 per year.1. At face value, does this system seem profitable? By how much?2. Assume that your company uses a discount rate of 6%.a. What is the Net Present Value (NPV) of this project?b. How does the NPV of this project change as you assume a higher or lower discountrate? Why?c. What is the IRR/ROI of this project?d. How much should the yearly cost-savings be in order to break even?i. (hint) use goal-seek/what-if analysis3. Suppose that you decide to finance the purchase of this system through a loan from the bank.The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year.a. Using a 70/30 debt-to-equity ratio, what is…arrow_forward
- Your boss has just presented you with the summary in the accompanying table of projected costs and annual receipts for a new product line. He asks you to calculate the IRR for this investment opportunity. What would you present to your boss, and how would you explain the results of your analysis? (It is widely known that the boss likes to see graphs of PW versus interest rate for this type of problem.) The company’s MARR is 10% per year.arrow_forwardI really want to understand how to organize and solve step by step this question.arrow_forwardYour company has done very well. To take it to the next level, you need to acquire another smaller company that has manufacturing capabilities you do not have. You are evaluating a possible company with a value of $2,500,000. You expect that if you acquire the value of your company will increase at 5% per year. Your company is currently valued at $15,000,000 and your investment timeframe is 4 years. If the MARR for the company is 3%, what is the present value net gain (or loss) associated with acquiring the company? $-827500 $-101050 $164474 $378740 $427598arrow_forward
- I need help with this problem and putting into an excel format with formulas. You are looking into the purchase of a condominium complex for your privately-held real estate firm REInvest Corp. The condominium complex would cost $38 million today. This condominium complex would be a typical investment for CondoPlus Inc. You think that the outcomes of this investment will depend on how the economy does in the near future. You think that there is a 40% chance that the economy will keep improving. This will result in CFs of $5 million next year, with the CFs increasing by 5% per year into perpetuity. There is a 30% chance of the economy growing very slowly, which will result in CFs of $3 million next year with 2% growth per year in perpetuity. And there is a 30% chance that the economy will shrink, causing CFs to be $1 million next year with only 1% growth per year into perpetuity. You could purchase an option to sell the condominium complex exactly 1 year from now for $25 million.…arrow_forwardTPPY investment in research and development has given it a technological and cost advantage in manufacturing a previously difficult to make electronic component. The firm is now experiencing rapid growth due to the advantages it now enjoys over its competitors. It estimates growth rates of 12% next year, 10% in the following year and 9% the year after that. It believes that its competitors would have improved their own processes by the fourth year, at which time it expects its growth rates to decrease to a constant rate of 4% thereafter. Its last dividend was $1.80 per share. Assume the cost of equity is 15%. 1. ii. 111. What is the value of the stock today Po? What is the value of the stock one year from today P₁? What is the value of the stock two years from today P₂?arrow_forwardYou are an advisor of Walton Hi-Tech Industry Limited (WHIL), a conglomerate based in Kaliakair, Bangladesh. Demand for your product has been high and you are looking at the following two alternative plans: Plan I: Spend $94 million today on a factory in Bhaluka, Mymensingh that will be completed in 1 year. You expect to receive $40 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Sharp Corporation, a Japanese competitor, for a further $70 million. Plan II: Spend $120 million today in a joint venture with Jamuna Electronics. You expect to begin generating yearly profits of $13.5 million at the end of the first year and every year thereafter. You expect the joint venture to last forever. The market interest you could achieve from IDLC Finance if you do not invest in any of the two is 8.5%. Which of the above plans would you undertake if you could undertake just one. Explain this scenario with proper reasoning.arrow_forward
- You are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $8 million. The product will generate free cash flow of $0.70 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.8%, a debt cost of capital of 6.38%, and a tax rate of 25%. Markum maintains a debt-equity ratio of 0.50. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? Question content area bottom Part 1 a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is million. (Round to two decimal places.) Part 2 b. How much debt will…arrow_forwardYou are a consultant who has been hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $8 million. The product will generate free cash flow of $0.70 million the first year, and this free cash flow is expected to grow at a rate of 6% per year. Markum has an equity cost of capital of 10.8%, a debt cost of capital of 6.38%, and a tax rate of 25%. Markum maintains a debt-equity ratio of 0.50. a. What is the NPV of the new product line (including any tax shields from leverage)? b. How much debt will Markum initially take on as a result of launching this product line? c. How much of the product line's value is attributable to the present value of interest tax shields? Question content area bottom Part 1 a. What is the NPV of the new product line (including any tax shields from leverage)? The NPV of the new product line is $enter your response here million. (Round to two decimal places.)arrow_forwardTowson Industries is considering an investment of $256,950 that is expected to generate returns of $90,000 per year for each of the next four years. What is the investment's internal rate of return? working on excel plz !arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Financial Planning & Forecasting - Spreadsheet Modeling; Author: Pat Obi;https://www.youtube.com/watch?v=dn8vTk0eaBg;License: Standard Youtube License