Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134202648
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 30, Problem 5P
BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a product ion cost of $0.90 per pound.
- a. What will be BHP's operating profit from copper next year if the price of copper is $1.25, $1.50, or $1.75 per pound, and the firm plans to sell all of its copper next year at the going price?
- b. What will be BHP’s operating profit from copper next year if the firm enters into a contract to supply copper to end users at an average price of $1.45 per pound?
- c. What will be BHP’s operating profit from copper next year if copper prices are described as in part (a), and the firm enters into supply contracts as in part (b) for only 50% of its total output?
- d. Describe situations for which each of the strategies in parts (a), (b), and (c) might be optimal.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Billiton is the world's largest mining firm.BHP expects to produce 1.50 billion pounds of copper next year, with a production cost of $0.90 per pound. a. What will be BHP's operating profit from copper next year if the price of copper is $1.25, $1.50, or $1.75 per pound, and the firm plans to sell all of its copper next year at the going price? b. What will be BHP's operating profit from copper next year if the firm enters into a contract to supply copper to end users at an average price of $1.45 per pound? c. What will be BHP's operating profit from copper next year if copper prices are described as in part (a), and the firm enters into supply contracts as in part (b) for only 50% of its total output? d. For each of the situations below, indicate which of the strategies (a), (b), or (c) might be optimal. Question content area bottom Part 1 a. What will be BHP's operating profit from copper next year if the price of copper is $1.25, $1.50, or $1.75 per…
Suppose the multinational Milton Asset Extraction (MAX) is considering an overseas project in a country with substantial political risk. MAX predicts that the project will yield USD100 million each year for two years. The initial cost of the project is USD145 million. In any given year there is a 13% chance that the project will be expropriated by the host country’s government. The discount rate for the project is 8%. Calculate the expected net present
Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 5.3 billion. The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of CNY 513 million in real terms. The plant will produce 100,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for CNY 78,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost CNY 31,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be CNY 2.4 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of CNY 313 million a year payable at the beginning of each year. Imperial’s discount rate for this type of project is 10% (nominal). The…
Chapter 30 Solutions
Corporate Finance: The Core (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 30.1 - How can insurance add value to a firm?Ch. 30.1 - Prob. 2CCCh. 30.2 - Prob. 1CCCh. 30.2 - What are the potential risks associated with...Ch. 30.3 - How can firms hedge exchange rate risk?Ch. 30.3 - Prob. 2CCCh. 30.4 - How do we calculate the duration of a portfolio?Ch. 30.4 - How do firms manage interest rate risk?Ch. 30 - The William Companies (WMB) owns and operates...Ch. 30 - Genentechs main facility is located in South San...
Ch. 30 - Prob. 3PCh. 30 - Your firm faces a 9% chance of a potential loss of...Ch. 30 - BHP Billiton is the worlds largest mining firm....Ch. 30 - Prob. 6PCh. 30 - Prob. 7PCh. 30 - Prob. 9PCh. 30 - Prob. 10PCh. 30 - Prob. 11PCh. 30 - You have been hired as a risk manager for Acorn...Ch. 30 - Prob. 13PCh. 30 - Prob. 14P
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
- Investing 100,000 in additional raw materials, mostly palladium, should allow cryogenic concepts to increase production and earn an additional 112,000 next year. This payoff could cover the investment, plus a 12% return. Palladium is traded in commodity markets. The CFO has studied the history of returns from investments in palladium and believes that investors in the precious metal can reasonably expect a 15% return. what is the opportunity cost of capital? Is Cryogenic proposed investment in palladium a good idea? Why or why not?I believe the Opportunity cost of capital is 12% the minimum acceptable rate of return. I think that it would be a good deal because whether it's return on investment of 12 or 15% it's more than 100,000. However I'm confused by this question, the only example I got was in relation to whether a firm was reinvesting money or giving the money back to shareholders. In the example if the firm had reinvested money into their project it would have been a 20%…arrow_forwardThe directors of EMY plc are currently considering an investment in a new production machinery to replace an existing one. The new machinery would produce goods more efficiently, leading to increased sales volume. The investment required will be GH¢1,150,000 payable at the start of the project. The alternative course of action would be to continue using the existing machinery for a further five years, at the end of which time it would have to be replaced. The following forecasts of sales and production volumes have been made: Sales in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 400,000 560,000 2 450,000 630,000 3 500,000 700,000 4 600,000 840,000 5 750,000 1,050,000 Production in units Year Using existing machinery Using new machinery GH¢ GH¢ 1 420,000 564,000 2 435,000 637,000 3 505,000 695,000 4 610,000 840,000 5 730,000 1,044,000…arrow_forwardZencorp is considering buying a $220,000 production machine. It would be depreciated (simplified straight line) for 10 years. This investment would allow the firm to increase sales by $130,000 per year. Operating expenses would increase by $80,000 per year also. The corporate tax rate is 21%. What is the annual cash flow for the project? O $75,720 O $44,120 O $170,520 O $71,100 O $53,720arrow_forward
- Suppose that UK Motors Ltd. is considering an investment of £30 million to develop a new factory. Assume that the company’s stockholders require a 22% rate of return, that the company’s bondholders require a 9% rate of return, that the UK corporate tax rate is 40%, that 35% of the project will be financed by debt, and that 65% of the project will be financed with equity. What must be the annual income from the project if it is to be a zero net present value investment? Give typing answer with explanation and conclusionarrow_forwardA project worth 100 million today can be taken at a costs of 88.24 million. Now suppose the investment option does not expire today, but rather will exist another year. Further, suppose that it is reasonable to expect that, if we wait until next year, there is 70% chance that the market will improve and the same project would be worth $ 113.21 million. On the other hand there is 30% chance that market will decline, which will result in a value of only 78.62 million. In either case, the project cost will increase by 2%. Assume that risk free rate is 3% and required rate of return on this project is 9% per annum. Answer the following questions based on this information. (1) When would you like to invest in the project (now or next year)?arrow_forwardA company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $108,168,164 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s NPV? 10.6.1 nnarrow_forward
- ABC Ltd is considering adding a new product line. Adding the product line would require additional investment of £0.5 million today and would return cash flow of £0.6 million in one year’s time. ABC’s assets consist of £0.5 million in cash, as well as production facilities to produce its existing products. Next year these facilities will return cash flows of £5 million if the demand is high and £2 million if the demand is low. The probability of high demand is 70%. The firm’s discount rate is 0% and you can ignore all cash flows extending beyond one year. Assume that ABC has no debt. (a) What is the expected net worth of ABC’s owners if they do not add the new product line and instead pay the cash out as dividends? (b) What is the expected net worth of ABC’s owners if they choose to add the new product line instead of paying out dividends? (c) Now redo assuming the company has debt with face value $2.5 million due in one year. What is the expected net worth of ABC’s owners if they do…arrow_forwardABC Ltd is considering adding a new product line. Adding the product line would require additional investment of £0.5 million today and would return cash flow of £0.6 million in one year’s time. ABC’s assets consist of £0.5 million in cash, as well as production facilities to produce its existing products. Next year these facilities will return cash flows of £5 million if the demand is high and £2 million if the demand is low. The probability of high demand is 70%. The firm’s discount rate is 0% and you can ignore all cash flows extending beyond one year. Assume that ABC has no debt. (a) What is the expected net worth of ABC’s owners if they do not add the new product line and instead pay the cash out as dividends? (b) What is the expected net worth of ABC’s owners if they choose to add the new product line instead of paying out dividends? (c) Now redo assuming the company has debt with face value $2.5 million due in one year. What is the expected net worth of ABC’s owners if they do…arrow_forwardGeneral Motors has a weighted average cost of capital of 9%. GM is considering investing in a new plant that will save the company $35 million over each of the first two years, and then $30 million each year thereafter. If the investment is $150 million, what is the net present value (NPV) of the project?arrow_forward
- 5. Suppose you are evaluating the following potential investment project: Spend $34 million today on a factory in Alabama that will be completed in 1 year. You expect to receive $12 million in profits from this factory at the end of the second year, at which time you also expect to sell the factory to Toyhonda, a Japanese competitor, for a further $30 million. The market interest rate is 9%. (Assume the inflation rate is constant at 0, and is expected to remain so for the duration of the above investments.) Would this plan generate profits enough to cover the investment cost? Yes b. No c. break-even (i.e., no profit nor loss) a.arrow_forwardAn oil and gas company wants to decide whether to initiate a new project. The success of the project depends heavily on the state of the economy, which has a 50/50 chance of being strong enough to support the venture. The project will require an initial investment of $1 Billion dollars, and the company expects to earn $500 Millions in annual revenues from the project—unless the economy goes into recession, in which case the project will return only $100 Millions per year. The company requires a 17% return on its investments. Should it undertake the project? If the company decides to wait a year, the economy has a 75% chance of improving sufficiently to ensure $500 Millions in annual returns. Does it make sense to wait for a year before making the investment? Use the options model approach to project evaluation to answer these two questions.arrow_forwardYou are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Gobstoppers. There is 60% chance that the market for these candies will produce profits of $100 million annually in perpetuity, and a 40% chance that the market will produce profits of only $20 million per year in perpetuity. The size of the market will become clear one year from now. Assume the cost of investment is the same this year or next year and the cost of capital of this project is 10% p.a.. The value of the option to wait is around: a. $400 million b. $0 million c. $36 million d. $93 million e. None of the abovearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial Risks - Part 1; Author: KnowledgEquity - Support for CPA;https://www.youtube.com/watch?v=mFjSYlBS-VE;License: Standard youtube license