a)
To determine: The prediction of Person X on the price of Company P for the next day and his explanation about the prediction
Introduction:
The private companies offer their stock for the first time to the public and this offering is termed as the initial public offerings. The private company that wants to become a publicly traded company usually proposes the initial public offerings.
b)
To determine: The merits of this opportunity
Introduction:
The private companies offer their stock for the first time to the public and this offering is termed as the initial public offerings. The private company that wants to become a publicly traded company usually proposes the initial public offerings.
Want to see the full answer?
Check out a sample textbook solutionChapter 15 Solutions
Fundamentals of Corporate Finance, 11th Edition (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- Start with the partial model in the file Ch15 P13 Build a Model.xlsx on the textbook’s Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firm’s optimal capital structure, and what is the weighted average cost of capital at the optimal structure?arrow_forwardMf2. Your firm is considering choosing either Project X or Project Y with the following cash flows: Year: 0. 1 2 3 4 Project X -$150,000 $75,000. $65,000 55,000 $45,000 Project Y -$180,000 $90,000. $70,000 $70,000 $50,000 Between a discount rate of ______ and ______ you can be sure your firm should prefer Project Y to Project X. a. 0%; 14.16% b. 0%; 10.25% c.14.16%; 24.26% d10.25; 22.63% e. 0%; 25%arrow_forwardChoose option a,b,c,d,e for the following: Question 4 – Chen and Co. expect its EBIT to be $100,000 every year forever. The firm can borrow at 11%. Chen currently has no debt, and its cost of equity is 18%. The tax rate is 31%. Chen will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization? a. 15.17% b. 17.15% c. Data are insufficient to formulate a response. d. 18% e. 11.17%arrow_forward
- Q : The pandemic issue due to covid19 has brought many economic at lower ebb.It has created impact on financial and non-financial markets.But the Economists are quite hopeful about economic recovery and their estimations are a kind of hope for all investors.Mr . Akhan is quite hopeful about stock market recovery hence he plans to invest 20 percent of his wealth in stock market.With assistance of team he has finalized to choose one of the following options.kindly help him in making decision: PSP - Stock Company is currently undergoing expansion and is not expected to change its cash dividend for the next 4 years the last dividend paid was PKR 3. Having completed expansion targets, higher earnings are expected to result causing a 30% increase in dividends each year for 3 years. After these three years of 30% growth, the dividend growth rate is expected to be 2% per year forever. Nestle Pakistan - Stock Company has reputation of having stable dividend policy. Company shall pay…arrow_forwardFinance A firm is considering two mutually exclusive projects, X and Y, with the following cash flows: 0 1 2 3 4 Project X -$1,000 $110 $280 $430 $750 Project Y -$1,000 $900 $110 $55 $50 The projects are equally risky, and their WACC is 9%. What is the MIRR of the project that maximizes shareholder value? Do not round intermediate calculations. Round your answer to two decimal places. %arrow_forwardS2 Q7 Given the following American put option prices and current underlying share price of $304.75, check to see whether the given put options violate the lower bound condition. Where you dettect a violation, devise an arbitrage strategy that will yield a positive cash flow now with zero possible cash flows in the future. Strike Put price 300 7.75 305 8.15 310 8.5 315 9.05arrow_forward
- A friend of yours owns a company that is about to get a large government contract. He tells you this inside information about the contract and also mentions that it should make the company's stock price increase dramatically. If you invest based on this inside information, then you are implicitly saying that stock markets are inefficient in which context? Question 5 options: weak form efficient market theory semi-strong form efficient market theory strong form efficient market theoryarrow_forward2. Growth options Companies often come across projects that have positive NPV opportunities in which the company does not invest. Companies must evaluate the value of the option to invest in a new project that would potentially contribute to the growth of the firm. These options are referred to as growth options. Consider the case of Mitata Co.: Mitata Co. is considering a three-year project that will require an initial investment of $45,000. It has estimated that the annual cash flows for the project under good conditions will be $80,000 and $5,000 under bad conditions. The firm believes that there is a 60% chance of good conditions and a 40% chance of bad conditions. If the firm is using a weighted average cost of capital of 13%, the expected net present value (NPV) of the project is . (Note: Round your answer to the nearest whole dollar.) Mitata Co. wants to take a potential growth option into account when calculating the project’s expected NPV. If conditions…arrow_forwardQ14. Without an abandonment option, a project is worth $15 million today. Suppose the value of the project is either $20 million one year from today (if product demand is high) or $10 million (if product demand is low). It is possible to sell off the project for $14 million if product demand is poor. Calculate the value of the abandonment option if the discount rate is 5 percent per year (in million, for illustration, if the answer is $21,553,100, then you should answer 21.5531)arrow_forward
- Mf2. 200) Consider a strip mall in Jackson Heights, Queens that recently sold for a cap rate of 7.47%. It's NOI in the following year is $350,000 and is expected to grow at an annual rate of 2%. What is the implied IRR on this investment for the owners of the mall according to the Gordon Growth Dividend Discount model? Write your answer in percent, but do not include the % signarrow_forward1. Basic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project. Be complete and thorough in your answer. 2. Briefly describe the agency relationship that exists between the shareholders and the managers of the firm and how it can result in what is referred to as the agency conflict?arrow_forwardReconsider Example 11.6, where the expected cash flows for the Capstone project arePeriod 0 1 2 3 4 5Cash Flow -$55,000 $17,094 $20,439 $20,069 $20,212 $29,660Suppose that Capstone consider the MicroCHP project to be just one of their normal risky projects. Then the appropriate discount rate to use is 15%. However, Capstone considers the MicroCHP project to be much riskier than normal projects, so it believes an additional risk premium of 6.93% should be added. If management has decided to use a risk-adjusted discount rate of 21.93% to compensate for the uncertainty of the cash flows, is this project acceptable?arrow_forward