Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 25, Problem 2P
Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?
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Chapter 25 Solutions
Corporate Finance
Ch. 25.1 - In a perfect capital market, how is the amount of...Ch. 25.1 - Prob. 2CCCh. 25.2 - Prob. 1CCCh. 25.2 - Is it possible for a lease to be treated as an...Ch. 25.3 - Why is it inappropriate to compare leasing to...Ch. 25.3 - Prob. 2CCCh. 25.3 - Prob. 3CCCh. 25.4 - Prob. 1CCCh. 25.4 - Prob. 2CCCh. 25 - Suppose an H1200 supercomputer has a cost of...
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- Let the current asset price be 100 dollars and atter time T, the price either goes up to 110 dollars or down to 91 dollars. Suppose the risk-free interest rare is 0.1. Assume a risk-neutral world setting. Calculate the probability of up movement for T = 0.5 years.arrow_forwardYou are offered a four-year investment opportunity costing $450,000 today. The investment will pay $115,500 in the first year, $136,500 in the second year, $159,250 in the third year, and $180,250 in the fourth year,. Investments of comparable risk require a 14% rate of return in the financial market. Should you accept the investment opportunity and why? OA. No, because the investment's net present value is negative. OB. No, because the investment's net present value is zero. OC. Yes, because the investment's cash payments represent a total return of 31% on the $450,000 investment. OD. Yes, those cash payments look good to me because they add up to $591,500 which is more than the $450,000 investment. OE. Yes, because the investment's net present value is greater than zero.arrow_forwardSuppose the risk-free interest rate is 4.6%. Having $600 today is equivalent to having what amount in one year? (Round to the nearestcent.) Having $600 in one year is equivalent to having what amount today? (Round to the nearestcent.) Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money? Why or why not? (Round to the nearestcent.)arrow_forward
- You currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows. Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate. (a) What is the NPV of this project? (b) Suppose you decide to finance this project with your own cash. How much money do you expect to have one year from now? (c) You have found investors who will fund the full cost of the project through equity. You will invest your cash at a risk-free rate. What is the share of equity they will ask for? How much money do you expect to have one year from now? (d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim…arrow_forwardIf a particular investment will pay $500, 5 months from now, and an additional $500, 9 months from now, what is the largest amount that an investor should be willing to invest today, assuming money earns a rate of return of 7%? Assume that the investment has no money left after the two withdrawals.arrow_forwardYou currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows. Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate. (d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim the cash you have invested outside of the project. What is the face value of the loan and the interest rate? How much money do you expect to have one year from now? (e) In light of your numerical answers above, discuss Modigliani and Miller's 1st proposition.arrow_forward
- Suppose you buy a machine and you have the option of paying the full price, $40,000, now; or $10,000 at the end of each of the next five years. What is the cost of capital, or the implied interest rate, for the two methods to be equivalent?arrow_forwardA new computer system will require an initial outlay of $19,000, but it will increase the firm’s cash flows by $3,800 a year for each of the next 8 years. How high can the discount rate be before you would reject the project? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal placesarrow_forwardAn investment will pay $50 at the end of each of the next 3 years, $250 at the end of Year 4, $350 at the end of Year 5, and $600 at the end of Year 6. If other investments of equal risk earn 10% annually, what is its present value? What is Its future value? Do not round intermediate calculations. Round your answers to the nearest cent.arrow_forward
- You are valuing an investment that will pay you $26,000 per year for the first 9 years,$34,000 per year for the next 11 years, and $47,000 per year the following 14 years (allpayments are at the end of each year).Another similar risk investment alternative is an account with a quoted annual interest rate of9.00% with monthly compounding of interest.Required:Calculate the value in today's dollars of the set of cash flows you have been offered i.e.for each investment alternative, and decide which option is more profitable.arrow_forwardA new computer system will require an initial outlay of $17,500, but it will increase the firm’s cash flows by $3,500 a year for each of the next 8 years. How high can the discount rate be before you would reject the project?arrow_forwardAn investment has a cost of $3500. The investment will have a payout of X at the end of the first year. This initial payout X will grow at the rate of 12% per year for the next 4 years, then by 7% per year for the next 4 years, and then at the rate of 3% per year for the following 3 years. You believe the riskiness of this investment is 9%. Calculate the smallest X that would entice you to invest.arrow_forward
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