Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 9, Problem 21PS
Certainty equivalents A project has the following
The estimated project beta is 1.5. The market return rm is 16%, and the risk-free rate rf is 7%.
- a. Estimate the
opportunity cost of capital and the project’s PV (using the same rate to discount each cash flow). - b. What are the certainty-equivalent cash, flows in each year?
- c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
- d. Explain why this ratio declines.
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The data related to a project with an investment amount of 10.000.000 TL is as follows, and the risk-free discount rate is 10%.
YEAR1
YEAR2
Possibility
Cash Flows
Possibility
Cash Flows
%20
3.000.000
%25
5.000.000
%60
7.000.000
%50
8.000.000
%20
8.000.000
%25
9.000.000
Calculate the expected Net Present Value of the project and the Standard Deviation of its Net Present Value based on these data.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively.
Time
0
1
2
3
4
5
6
Cash Flow
-1,040
140
460
660
660
260
660
Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
Which of the following comes closest to the net present value (NPV) of a project whose initial investment is $5 and which produces two cash flows: the first at the end of year 2 of $3 and the second at the end of year 4 of $7? The required rate of return is 13%?
Select one:
a.
$1.84
b.
$0
c.
$1.64
d.
$2.05
e.
$2.26
Chapter 9 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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