Questions from Corporate Finance

Q: Operating leverage What is the lowest possible value for the degree of

Operating leverage What is the lowest possible value for the degree of operating leverage for a profitable firm? Show with a numerical example that if Modern Artifacts (see Problem 12) has zero fixed...

Q: A project has fixed costs of $1,000 per year

A project has fixed costs of $1,000 per year, depreciation charges of $500 a year, annual revenue of $6,000, and variable costs equal to two-thirds of revenues. a. If sales increase by 10%, what will...

Q: True or false? a. Sensitivity analysis is unnecessary for

True or false? a. Sensitivity analysis is unnecessary for projects with asset betas that are equal to zero. b. Sensitivity analysis can be used to identify the variables most crucial to a project’s su...

Q: Monte Carlo simulation Suppose a manager has already estimated a project’s cash

Monte Carlo simulation Suppose a manager has already estimated a project’s cash flows, calculated its NPV, and done a sensitivity analysis like the one shown in Table 10.2. List the additional steps r...

Q: Real options Explain why options to expand or contract production are most

Real options Explain why options to expand or contract production are most valuable when forecasts about future business conditions are most uncertain.

Q: Real options describe the real option in each of the following cases

Real options describe the real option in each of the following cases: a. Moda di Milano postpones a major investment. The expansion has positive NPV on a discounted cash-flow basis, but top management...

Q: Real options True or false? a. Decision trees can

Real options True or false? a. Decision trees can help identify and describe real options. b. The option to expand increases PV. c. High abandonment value decreases PV. d. If a project has positive NP...

Q: How would you respond to the following comments? a.

How would you respond to the following comments? a. “Efficient market, my eye! I know lots of investors who do crazy things.” b. “Efficient market? Balderdash! I know at least a dozen people who have...

Q: A silver mine can yield 10,000 ounces of silver at

A silver mine can yield 10,000 ounces of silver at a variable cost of $32 per ounce. The fixed costs of owning the mine are $40,000 per year regardless of whether the mine is open or closed. In half t...

Q: Real options An auto plant that costs $100 million to build

Real options An auto plant that costs $100 million to build can produce a line of flex-fuel cars. The investment will produce cash flows with a present value of $140 million if the line is successful...