a)
To determine: Whether the following project has similar risk to that of average risk of the firm.
Introduction:
Risk includes the chance an investment’s real return will vary from the expected return. Risk includes the probability of losing all the original investment or losing some. Risk can be classified into unsystematic risk or systematic risk.
a)
Explanation of Solution
Given information:
Company C considers initiation of a new version of Armour, all designed to protect notebook computers and to clean.
Explanation:
Though there might be few differences, the market risk of the cash flows from this new products is expected to be similar to Clorox’s other household products. Thus, it is reasonable to accept that it has the similar risk similar to the average risk of the firm.
b)
To determine: Whether the following project has a similar risk to that of the average risk of the firm.
Introduction:
Risk includes the chance an investment’s real return will vary from the expected return. Risk includes the probability of losing all the original investment or losing some. Risk can be classified into unsystematic risk or systematic risk.
b)
Explanation of Solution
Given information:
Company G plans to expand its headquarters by purchasing real estate.
Explanation:
A real estate investment has different market risks compared to Company G investment in advertising and internet search technology. It is not right to assume this investment has risk equal to the average risk of the firm.
c)
To determine: Whether the following project has a similar risk to that of the average risk of the firm.
Introduction:
Risk includes the chance an investment’s real return will vary from the expected return. Risk includes the probability of losing all the original investment or losing some. Risk can be classified into unsystematic risk or systematic risk.
c)
Explanation of Solution
Given information:
Company T decides to enlarge the number of stores in the south eastern Country U.
Explanation:
Company T expands its business in the same line, which is likely to have the risk similar to the average risk of the firm.
d)
To determine: Whether the following project has a similar risk to that of the average risk of the firm.
Introduction:
Risk includes the chance that an investment’s real return will vary from the expected return. Risk includes the probability of losing all the original investment or losing some. Risk can be classified into unsystematic risk or systematic risk.
d)
Explanation of Solution
Given information:
Company GE decides to open a new U studio theme park in Country C.
Explanation:
The theme park is expected be sensitive in the development of the Country C economy. Its risk might be different from Company GE’s other divisions and from the company as a whole. It is not right to assume this investment had risk similar to the average risk of the firm.
Want to see more full solutions like this?
Chapter 18 Solutions
Corporate Finance
- Margos Memories, a company that specializes in photography and creating family and group photo portfolios, has 50 stores in major malls around the U.S. The company is considering an online business, which will require a substantial Investment in web design, security, payment processing, and technology in order to launch successfully. What potential advantages or disadvantages will be difficult to quantify from a capital investment standpoint?arrow_forwardThe J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.6 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $7.7 million on an aftertax basis. In five years, the aftertax value of the land will be $8.1 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $29.8 million to build. The following market data on DEI’s securities are current: Debt: 185,000 bonds with a coupon rate of 7.7 percent outstanding, 25…arrow_forward
- You are looking for security for your business. Your firm does highly confidential work so you absolutely must have security. You have found two options. The first option is a high tech solution with door sensors, motion detectors, cameras and card readers for door access. The second option is rather low tech. You would upgrade your door locks and hire a guard to be on duty overnight. The costs for each of these options is shown below. If your cost of capital is 8% which option should you select? Support your answer with the appropriate discounted cash flow analysis. Upfront CostAnnual CostLength of ContractHi Tech$200000$ 8,0007Low Tech$ 10,000$ 50,0003arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.3 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.79 million after taxes. In five years, the land will be worth $8.09 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.76 million to build. The following market data on DEI’s securities are current: Debt: 93,800 7.2 percent coupon bonds outstanding, 26 years to maturity, selling for 93.1 percent of par; the bonds have a $1,000 par value each…arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.9 million on an aftertax basis. In five years, the aftertax value of the land will be $7.3 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $33.5 million to build. The following market data on DEI’s securities are current: Debt: 145,000 bonds with a coupon rate of 6.9 percent outstanding, 22…arrow_forward
- Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.9 million on an aftertax basis. In five years, the aftertax value of the land will be $7.3 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $33.5 million to build. The following market data on DEI’s securities are current: Debt: 145,000 bonds with a coupon rate of 6.9 percent outstanding, 22…arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.9 million on an aftertax basis. In five years, the aftertax value of the land will be $7.3 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $33.5 million to build. The following market data on DEI’s securities are current: Debt: 145,000 bonds with a coupon rate of 6.9 percent outstanding, 22…arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.8 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.9 million on an aftertax basis. In five years, the aftertax value of the land will be $7.3 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $33.5 million to build. The following market data on DEI’s securities are current: Debt: 145,000 bonds with a coupon rate of 6.9 percent outstanding, 22…arrow_forward
- Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.1 million on an aftertax basis. In five years, the aftertax value of the land will be $6.5 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.7 million to build. The following market data on DEI’s securities are current: Debt: 250,000 bonds with a coupon rate of 6.1 percent outstanding, 24…arrow_forwardSuppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.1 million on an aftertax basis. In five years, the aftertax value of the land will be $6.5 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.7 million to build. The following market data on DEI’s securities are current: Debt: 250,000 bonds with a coupon rate of 6.1 percent outstanding, 24…arrow_forwardCurrently, the world economy is facing an unprecedented challenge due to corona-virus pandemic. In Bangladesh, most of the businesses have been severely affected by corona-virus pandemic and possibly the effects of this virus will last throughout this year. Last year, you started a cement manufacturing business and currently evaluating your capital investment decision for another unit. What will be the effect of corona-virus in your existing business? Will be it a good strategy to invest another unit this year? Provide a detailed explanationarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTEssentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax CollegeManagerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning