Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

4th Edition

ISBN: 9780134083278

Author: Jonathan Berk, Peter DeMarzo

Publisher: PEARSON

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Textbook Question

Chapter 22, Problem 6P

You are a financial analyst at Global Conglomerate and are considering entering the shoe business. You believe that you have a very narrow window for entering this market. Because of Christmas demand, the time is right today and you believe that exactly a year from now would also be a good opportunity. Other than these two windows, you do not think another opportunity will exist to break into this business. It will cost you $35 million to enter the market. Because other shoe manufacturers exist and are public companies, you can construct a perfectly comparable company. Hence, you have decided to use the Black-Scholes formula to decide when and if you should enter the shoe business. Your analysis implies that the current value of an operating shoe company is $40 million and it has a beta of 1. However, the flow of customers is uncertain, so the value of the company is volatile-your analysis indicates that the volatility is 25% per year. Fifteen percent of the value of the company is attributable to the value of the free cash flows (cash available to you to spend how you wish) expected in the first year. If the one-year risk-free rate of interest is 4%:

a. Should Global enter this business and, if so, when?
b. How will the decision change if the current value of a shoe company is $36 million instead of $40 million?
c. Plot the value of your investment opportunity as a function of the current value of a shoe company.
d. Plot the beta of the investment opportunity as a function of the current value of a shoe company.

Features Features Normal distribution is characterized by two parameters, mean (µ) and standard deviation (σ). When graphed, the mean represents the center of the bell curve and the graph is perfectly symmetric about the center. The mean, median, and mode are all equal for a normal distribution. The standard deviation measures the data's spread from the center. The higher the standard deviation, the more the data is spread out and the flatter the bell curve looks. Variance is another commonly used measure of the spread of the distribution and is equal to the square of the standard deviation.

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Chapter 22, Problem 5P

Chapter 22, Problem 7P

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Chapter 22 Solutions

Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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. 1CC Ch. 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. 2CC Ch. 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. 1CC Ch. 22.5 - Prob. 2CC Ch. 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. 1CC Ch. 22.7 - Prob. 2CC Ch. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4P Ch. 22 - Prob. 5P Ch. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7P Ch. 22 - Prob. 8P Ch. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12P Ch. 22 - Prob. 13P Ch. 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. 22P Ch. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24P Ch. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26P Ch. 22 - Assume that the project in Example 22.5 pays an...

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