Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Chapter 12, Problem 25PS
General Weedkillers dominates the chemical weed control market with its patented product Weed-ex. The patent is about to expire, however. What are your
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Identify each of the following risks as most likely to be systematic risk or diversifiable risk:
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Jon Jackson Manufacturing is searching for suppliers for its new line of equipment. Jon has narrowed his choices to two sets ofsuppliers. Believing in diversification of risk, Jon would select two suppliers under each choice. However, he is still concernedabout the risk of both suppliers failing at the same time. The “San Francisco option” uses both suppliers in San Francisco. Bothare stable, reliable, and profitable firms, so Jon calculates the “unique-event” risk for either of them to be 0.5%. However, becauseSan Francisco is in an earthquake zone, he estimates the probability of an event that would knock out both suppliers to be 2%.The “North American option” uses one supplier in Canada and another in Mexico. These are upstart firms; John calculates the“unique-event” risk for either of them to be 10%. But he estimates the “super-event” probability that would knock out both of thesesuppliers to be only 0.1%. Purchasing costs would be $500,000 per year using the San Francisco option…
Consider a company faced with a competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability (p) of 0.8, which means the other outcome would have only a 20 percent chance of occurring (1-p=0.2). These outcomes are shown in the table below:
Chapter 12 Solutions
Essentials Of Investments
Ch. 12 - Prob. 1PSCh. 12 - Why does it make intuitive sense that the slope of...Ch. 12 - Which one of the following firms would be...Ch. 12 - Prob. 4PSCh. 12 - How do each of the following affect the...Ch. 12 - The present value of a firm’s projected cash flows...Ch. 12 - Prob. 7PSCh. 12 - Which of the following is consistent with a...Ch. 12 - Which of the following is not a governmental...Ch. 12 - Prob. 10PS
Ch. 12 - Prob. 11PSCh. 12 - ATech has fixed costs of 7 million and profits of...Ch. 12 - Choose an industry and identify the factors that...Ch. 12 - What monetary and fiscal policies might be...Ch. 12 - If you believe the U.S. dollar is about to...Ch. 12 - Unlike other investors, you believe the Fed is...Ch. 12 - Consider two firms producing smartphones. One uses...Ch. 12 - Prob. 18PSCh. 12 - Prob. 19PSCh. 12 - Prob. 20PSCh. 12 - In which stage of the industry life cycle would...Ch. 12 - Prob. 22PSCh. 12 - Why do you think the change in the index of labor...Ch. 12 - You have 5,000 to invest for the next year and are...Ch. 12 - General Weedkillers dominates the chemical weed...Ch. 12 - Prob. 26PSCh. 12 - Prob. 27PSCh. 12 - Prob. 28PSCh. 12 - Prob. 29PSCh. 12 - Prob. 30PSCh. 12 - Prob. 31PSCh. 12 - Prob. 32PSCh. 12 - Prob. 33CCh. 12 - Prob. 1CPCh. 12 - Prob. 2CPCh. 12 - Prob. 3CPCh. 12 - Prob. 4CPCh. 12 - Prob. 5CPCh. 12 - Prob. 1WM
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- Consider a company faced with a competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability (p) of 0.8, which means the other outcome would have only a 20 percent chance of occurring (1-p=0.2). These outcomes are shown in the table below:Competitive ResponseCompany action Maintain Price, p=0.8 Reduce Price, (1-p)=0.2Reduce Price $165,000 $125,000Maintain Price $175,000 $105,000The expected monetary value (EMV) of reducing the price isarrow_forwardJacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? a. Profits will increase when buyers have lower switching costs. b. Significant up-front capital requirements for new entrants will help Jacobs’ profit margins. c. Profitability is diminished when there are many suppliers. d. Rival firms willing to spend a lot of money on advertising will increase Jacobs’ profitsarrow_forwardJacobs Inc. is a relatively new company that has established a position in the highly competitive biotechnology industry. Which of the following statements is correct regarding Jacobs’ profitability? Profits will increase when buyers have lower switching costs. Significant up-front capital requirements for new entrants will help Jacobs’ profit margins. Profitability is diminished when there are many suppliers. Rival firms willing to spend a lot of money on advertising will increase Jacobs’ profitsarrow_forward
- The Miramar Company is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table: a. Compute the expected value for each decision and select the best one. b. Develop the opportunity loss table and compute the expected opportunity loss for each product. c. Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.arrow_forwardConsider a company faced with a competitor's price reduction. Should the company also reduce price in order to maintain market share or should the company maintain its current price? The company has conducted some preliminary research showing the financial outcomes of each decision under two competitor responses: the competition maintains its price or the competition lowers its price further. The company feels pretty confident that the competitor cannot lower its price further and assigns that outcome a probability (p) of 0.7, which means the other outcome would have only a 30 percent chance of occurring (1-p=0.3). These outcomes are shown in the table below:Competitive ResponseCompany action Maintain Price, p=0.7 Reduce Price, (1-p)=0.3Reduce Price $155,000 $125,000Maintain Price $165,000 $95,000What is the expected value of perfect information (EMV Subscript PI)? Should the research be conducted? Assume that conducting more research costs $15,000.arrow_forwardHoward Weiss, Inc., is considering building a sensitive new radiation scanning device. His managers believe that there is a probability of 0.4 that the ATR Co. will come out with a competitive product. If Weiss adds an assembly line for the product and ATR Co does not follow with a competitive product, Weiss's expected profit is $40,000, if Weiss adds an assembly line and ATR follows suit, Weiss still expects $10,000 profit. If Weiss adds a new plant addition and ATR does not produce a competitive product, Weiss expects a profit of $600,000, if ATR does compete for this market, Weiss expects a loss of $100,000 a) Determine the EMV of each decision. b) Compute the expected value of perfect information.arrow_forward
- b. Suppose you discover that Chiptech’s competitor has developed a new chip that will eliminate Chiptech’s current technological advantage in this market. This new product, which will be ready to come to the market in two years, will force Chiptech to reduce the prices of its chips to remain competitive. This will decrease ROE to 19%, and, because of falling demand for its product, Chiptech will decrease the plowback ratio to 0.5. The plowback ratio will be decreased at the end of the second year, at t = 2: The annual year-end dividend for the second year (paid at t = 2) will be 50% of that year’s earnings. What is your estimate of Chiptech’s intrinsic value per share? (Hint: Carefully prepare a table of Chiptech’s earnings and dividends for each of the next three years. Pay close attention to the change in the payout ratio in t = 2.) (Round your answers to 2 decimal places.) At time 2= At time 0= c. No one else in the market perceives the threat to Chiptech’s market. In fact, you are…arrow_forwardChemitronix Ltd. is a microchips manufacturing company. It was found that the business is at the maturity stage, demanding some change. After rigorous research, management came up with the following decision variables Expansion: 45% chance of gaining 1,500,000; 55% chance of losing X New Product: 50% chance of gaining 900,000; 50% chance of losing 572279 What must have been the value of expansion loss if expansion and new product will result to the same expected monetary values?arrow_forwardBulldogs Inc. wants to enter the global market. Which one may not be the reason in such decision? Production efficiency in other countries may result to economies and synergies that are favorable to the company To seek technologies not yet present in the home country To broaden market and increase shareholder value Essential materials and labor rates may be more expensive in other countriesarrow_forward
- The following are some selected quotes from senior executives: CEO, Worthington Industries fa high technology steel company): "We try to find the best technology, stay ahead of the competition, and serve the customer.... We’ll make any investment that will pay back quickly... but if it is something that we really see as a must down the road, payback is not going to be that important." Chairman of Amgen Inc. (a biotech company): “You cannot really run the numbers, do net present value calculations, because the uncertainties are really gigantic. ... You decide on a project you want to run, and then you run the numbers [as a reality check on your assumptions]. Success in a business like this is much more dependent on tracking rather than on predicting, much more dependent on seeing results over time, tracking and adjusting and readjusting, much more dynamic, much more flexible." Chief Financial Officer of Merck & Co., Inc. (a pharmaceutical company):"... at the individual product…arrow_forwardIn a strategy meeting, a manufacturing company’s president said, “If we raise the price of our product, the company’s break-even point will be lower.” Thefinancial vice president responded by saying, “Then we should raise our price. The company will be less likely to incur a loss.” Do you agree with the president? Why? Do you agree with the financial vice president? Why?arrow_forwardProject II is an inventory-control system, with an IRR of 10.60% & a beta of 0.90. Incredible Corp. has two divisions: Silver Group & Blue Group. Both groups are considering implementing Project II. Silver Group makes health products and has an asset beta of 1.20. Blue Group is a mining operation with an asset beta of 0.70. The risk-free rate is 3.00%; the expected return on the market is 11.00%. Explain clearly and concisely whether each division should accept or reject Project II, being sure to justify your reasoning.arrow_forward
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