Q: You run a perpetual encabulator machine, which generates revenues averaging $
You run a perpetual encabulator machine, which generates revenues averaging $20 million per year. Raw material costs are 50% of revenues. These costs are variable—they are always proportional to reven...
See AnswerQ: Many investment projects are exposed to diversifiable risks. What does “
Many investment projects are exposed to diversifiable risks. What does “diversifiable” mean in this context? How should diversifiable risks be accounted for in project valuation? Should they be ignore...
See AnswerQ: John Barleycorn estimates his firm’s after-tax WACC at only 8
John Barleycorn estimates his firm’s after-tax WACC at only 8%. Nevertheless, he sets a 15% companywide discount rate to offset the optimistic biases of project sponsors and to impose “discipline” on...
See AnswerQ: Fudge factors Mom and Pop Groceries has just dispatched a year’s supply
Fudge factors Mom and Pop Groceries has just dispatched a year’s supply of groceries to the government of the Central Antarctic Republic. Payment of $250,000 will be made one year hence after the ship...
See AnswerQ: True or false? a. Financing decisions are less easily
True or false? a. Financing decisions are less easily reversed than investment decisions. b. Tests have shown that there is almost perfect negative correlation between successive price changes. c. The...
See AnswerQ: True or false? a. The company cost of capital
True or false? a. The company cost of capital is the correct discount rate for all projects because the high risks of some projects are offset by the low risk of other projects. b. Distant cash flows...
See AnswerQ: An oil company is drilling a series of new wells on the
An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 20% of the new wells will be dry holes. Even if a new well strikes oil, there is still uncertainty abo...
See AnswerQ: A project has a forecasted cash flow of $110 in year
A project has a forecasted cash flow of $110 in year 1 and $121 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of .5. If you use a cons...
See AnswerQ: A project has the following forecasted cash flows: /
A project has the following forecasted cash flows: 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...
See AnswerQ: The McGregor Whisky Company is proposing to market diet scotch. The
The McGregor Whisky Company is proposing to market diet scotch. The product will first be test-marketed for two years in southern California at an initial cost of $500,000. This test launch is not exp...
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