Firm A has 10 shares. The present value (PV) of the firm is 500, i.e., 50 per share. It has an investment opportunity requiring a costly investment of £X but it must sell new shares to raise this in order to take this opportunity. If it succeeds in issuing and investing, the end period firm PV will be 800 (including the cash raised by any new issue). If the current market price of a share is 33.33, what is the highest investment cost that will allow the project to proceed?

Firm A has 10 shares. The present value (PV) of the firm is 500, i.e., 50 per share. It has an investment opportunity requiring a costly investment of £X but it must sell new shares to raise this in order to take this opportunity. If it succeeds in issuing and investing, the end period firm PV will be 800 (including the cash raised by any new issue). If the current market price of a share is 33.33, what is the highest investment cost that will allow the project to proceed?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 5.2IP

See similar textbooks

Similar questions

b) A stock you are evaluating just paid an annual dividend of £2.50. Dividends have grown at a constant rate of 1.5% over the last 15 years and you expect this to continue. i. If the required rate of return on the stock is 12%, what is the fair present value? If the required rate of return on the stock is 15%, what should the fair value be four years from today? ii.
SABIC Company (A Petrochemical Company) plans to buy A General Electric (GE) Plastic Plant in five years from now. SABIC expects to offer $ 100 Million as cost of the deal. SABIC has an investment of its capital at an interest rate of 7%. Estimating how much should SABIC put now is achieved using the following: Select one: O a. P=100,000,000(A/P,7%,5) O b. F=100,000,000 (F/A,5,79%) F=100,000,000 (F/P,7%,5) Oc. O d. P=100,000,000(P/F,7%,5)
Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below Stock Price 100 90 80 95 80 90 70 70 60 60 50 50 40 30 20 10 0 October November December January Feburary March (a) (b) O Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum…
In a financial market a stock is traded with a current price of 50. Next period the price of the stock can either go up with 30 per cent or go down with 25 per cent. Risk-free debt is available with an interest rate of 8 per cent. Also traded are European options on the stock with an exercise price of 45 and a time to maturity of 1, i.e. they mature next period. Find prices of Arrow-Debreu securities.
Tim Smunt has been asked to evaluate two machines. After some investigation, he determines that they have the costs shown in the following table: He is told to assume that: Original Cost Labor per year Maintenance per year Salvage value 1. The life of each machine is 3 years. 2. The company thinks it knows how to make 14% on investments no more risky than this one. 3. Labor and maintenance are paid at the end of the year. The NPV for Machine A = $ The NPV for Machine B = $ Machine A $15,000 $2,200 $4,000 $1,600 (round your response to the nearest whole number and include a minus sign if necessary). (round your response to the nearest whole number and include a minus sign if necessary). Using the net present value as the basis of comparing the machines, Tim should recommend Machine B $20,000 $4,800 $800 $7,500
The Rosebud Motel is a must-stay for any road-tripper or weary traveler. The motel fils each of its 24 rooms for 200 nights each during the year. Annual fixed costs total $160,000. The variable cost of one night's stay is $100. The motel owners expect a 50% return on the company's $500,000 of assets each year. The Rosebud Motel is currently the only place to stay for 50 miles. What should Rosebud's cost-plus price be if sales volume and costs are expected to stay consistent? OA. $133.33 OB. $185.42 OC. $2,150.00 OD. $152.08 OE. The Rosebud Motel would not set its price as it is a price-taker in this market.
EXAMPLE 5-1 An investment of $10,000 can be made in a project that will produce a uniform annual revenue of $5,310 for 5 years and then have a salvage value of $2.000, Annual disbursements will be $3,000 each year for operation and maintenance costs. The company is willing to accept any project that will earn :0% or more, before income taxes, on all invested capital. Show whether this is a desirable investment by using the present worth method. Draw the cash flow diagram
An investor has $24,000 to invest in bonds of AAA and B qualities. The AAA bonds yield an average of 6% and the B bonds yield 10%. The investor requires that at least three times as much money should be invested in AAA bonds as in B bonds. How much should be invested in each type of bond to maximize the return? What is the maximum return? Define the variables needed to solve this problem. Organize your given information. (This part NOT graded, but encouraged.) Write the complete linear programming problem, which includes the objective function and all constraints. Graph and make sure all lines are labeled and shaded/solution region is clear and easy to identify. Create a corner point chart. Remember to mark your solution. Answer in a complete sentence or two: How much should be invested in each type of bond to maximize the return? What is the maximum return?
B-2. A firm must decide whether to construct a small, medium or large stamping plant. A consultant’s report indicates a 0.20 probability that demand will be low and 0.80 that demand will be high. If the firm builds a small facility and demand turns out to be low, the Net Present Value (NPV) will be $42M. If demand turns out to be high, the firm can either subcontract and realize the NPV of $42M or expand greatly for a Net Present Value of $48M. The firm could build a medium size facility as a hedge: if demand turns out to be low, its NPV is estimated at $22M; if demand turns out to be high, the firm could do nothing and realize a NPV of $46M, or could expand and realize a NPV of $50M. If the firm builds a large facility and demand is low, the NPV will be ($20M), whereas high demand will result in a NPV of $72M. Analyze and solve this problem using a decision tree What is the Maximin Alternative and c) Compute the…
find AWx(10%) and AWy(10%)
The following table shows the total sales, in thousands, since a new game was brought to market. Month Sales 0 2 4 6 Total sales 0 2.2 5.4 9.5 19.1 Enter the closest value in the table. 8 The point of diminishing returns occurs (a) Plot this data and determine the point of diminishing returns. MI 10 12 14 i 27.2 32.9 35.4 months after the game is introduced. (b) Predict total possible sales of this game, using the point of diminishing returns from the table.
2) a) Suppose that a firm considers an investment in 2021. The cost of that investment which will be paid in 2021 is 50 000 000. The lifetime of that investment is 5 years. The following cashflows are expected from that investment 2022: 10 000 000 2023: 12 000 000 2024: 12 000 000 2025: 10 000 000 2026: 8 000 000 Given this; set out the equation from which MEI (marginal efficiency of investment is derived)