CORPORATE FINANCE CUSTOM W/CONNECT >BI
11th Edition
ISBN: 9781307036633
Author: Ross
Publisher: MCG/CREATE
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 23, Problem 5QP
Real Options Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $103 per barrel, and the land is believed to contain 435,000 barrels of oil. If found, the oil would cost $75 million to extract. Treasury bills that mature in one year yield a continuously
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
The business plans to invest a further $15 million in machinery and equipment and is considering two
possible financing options. The first option is to make a one-for-four rights issue. The current market price
per share is $2.00 and the rights shares would be issued at a discount of 25% on this market price. The
second option is to take a further loan that will have an initial annual rate of interest of 10%. This is a
variable rate and, while interest rates have been stable for a number of years, there has been recent
speculation that interest rates will begin to rise in the near future. The outcome of the expansion is not
certain. The management team involved in developing and implementing the expansion plans has
provided three possible outcomes concerning earnings before interest and taxes for the following year:
Change in earnings before interest and taxes from previous year Optimistic 30% Most likely 10% Pessimistic
20% The dividend per share for the forthcoming year is expected…
The business plans to invest a further $15 million in machinery and equipment and is considering two
possible financing options. The first option is to make a one -for-four rights issue. The current market price
per share is $2.00 and the rights shares would be issued at a discount of 25% on this market price. The
second option is to take a further loan that will have an initial annual rate of interest of 10%. This is a
variable rate and, while interest rates have been stable for a number of years, there has been recent
speculation that interest rates will begin to rise in the near future. The outcome of the expansion is not
certain. The management team involved in developing and implementing the expansion plans has
provided three possible outcomes concerning earnings before interest and taxes for the following year:
Change in earnings before interest and taxes from previous year Optimistic 30% Most likely 10% Pessimistic
20% The dividend per share for the forthcoming year is expected…
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $235,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.4 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?
Chapter 23 Solutions
CORPORATE FINANCE CUSTOM W/CONNECT >BI
Ch. 23 - Employee Stock Options Why do companies issue...Ch. 23 - Real Options What are the two options that many...Ch. 23 - Project Analysis Why does a strict NPV calculation...Ch. 23 - Real Options Utility companies often face a...Ch. 23 - Prob. 5CQCh. 23 - Real Options Star Mining buys a gold mine, but the...Ch. 23 - Real Options You are discussing real options with...Ch. 23 - Real Options and Capital Budgeting Your company...Ch. 23 - Insurance as an Option Insurance, whether...Ch. 23 - Real Options How would the analysis of real...
Ch. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Binomial Model Gasworks, Inc., has been approached...Ch. 23 - Real Options The Webber Company is an...Ch. 23 - Real Options Jet Black is an international...Ch. 23 - Real Options Sardano and Sons is a large, publicly...Ch. 23 - Real Options Wet for the Summer, Inc.,...Ch. 23 - Prob. 8QPCh. 23 - Binomial Model In the previous problem, assume...Ch. 23 - Real Options You are in discussions to purchase an...Ch. 23 - Prob. 1MCCh. 23 - Prob. 2MCCh. 23 - Your options, like most employee stock options,...Ch. 23 - Why do you suppose employee stock options usually...Ch. 23 - Prob. 5MCCh. 23 - Prob. 6MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Wansley Lumber is considering the purchase of a paper company, which would require an initial investment of $300 million. Wansley estimates that the paper company would provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital for the paper company is 13%. Should Wansley purchase the paper company? Wansley realizes that the cash flows in Years 1 to 20 might be $30 million per year or $50 million per year, with a 50% probability of each outcome. Because of the nature of the purchase contract, Wansley can sell the company 2 years after purchase (at Year 2 in this case) for $280 million if it no longer wants to own it. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? Again, assume that all cash flows are discounted at 13%. Wansley can wait for 1 year and find out whether the cash flows will be $30 million per year or $50 million per year before deciding to purchase the company. Because of the nature of the purchase contract, if it waits to purchase, Wansley can no longer sell the company 2 years after purchase. Given this additional information, does decision-tree analysis indicate that it makes sense to purchase the paper company? If so, when? Again, assume that all cash flows are discounted at 13%.arrow_forwardOptimal corporation wants to expand their manufacturing facilities. They have two choices, first to expand the current site at a cost of $290,000 per year for two years to complete the expansion, or to sell their current site for $1.3 million and purchase a new larger facility at a cost of $900,000 in the industrial zone. If the annual interest rate is 8%, And the Optimal corporation wants to factor inflation in their calculations, what is the equivalent nominal interest rate if expected inflation rate is 4% in the coming years? Critically discuss the significance of including the factor of inflation in corporate finance calculationsarrow_forwardA petroleum company is planning to sell a number of existing oil wells. The wells are expected to produce 100,000 barrels of oil per year for 14 more years. If the selling price per barrel of oil is currently 35, how much would you be will to pay for the wells if the price of oil is expected to decrease by $2 per barrel every 3 years, with the first decrease to occur immediately at the end of year 2? Assume that the interest rate is 10 % per year and that oil sales are made at the end of each year.arrow_forward
- A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6.1 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7%, or as much as $2.5 million if the rate is 15%, but will most likely be about $2.3 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates? The annual worth with a rate of 7% is $ ___ . The annual worth with a rate of 10% is $ ____ . The annual worth with a rate of 15% is $ ____ . The decision isarrow_forwardKohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)arrow_forwardSouthern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $185,000, $225,000, and $345,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 12 percent, what are the maximum Southern Tours should pay today to acquire Holiday Vacations? a. 503,098 b. 538,615 c. $545,920 d. $590,110arrow_forward
- Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $235,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 13.6 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwardPhoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $850 per ounce. a. Suppose the spot price of platinum falls to $775 in 3 months' time. Does Phoenix have a profit or loss on the futures contract? b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. What is the total lock-in cost? c. If the spot price of platinum increases to $975 after 3 months, does Phoenix have a profit or loss on the futures contract? d. What is the total lock-in cost? Phoenix Motors has a b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. Total cost Phoenix Motors has a Total cost on the futures contract equal to on the futures contract equal to C. d.arrow_forwardPhoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price of $950 per ounce. a. Suppose the spot price of platinum falls to $825 in 3 months' time. Does Phoenix have a profit or loss on the futures contract? b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. What is the total lock-in cost? c. If the spot price of platinum increases to $1,025 after 3 months, does Phoenix have a profit or loss on the futures contract? d. What is the total lock-in cost? a. Phoenix Motors has a on the futures contract equal to b-1. Has it locked in the cost of purchasing the platinum it needs? b-2. Total cost c. Phoenix Motors has a on the futures contract equal to d. Total costarrow_forward
- Abbott Mining Systems wants to determine whether it should buy now or buy later for upgrading a piece of equipment used in deep mining operations. If the company selects plan N, the equipment will be purchased now for $200,000. However, if the company selects plan L, the purchase will be deferred for 3 years when the cost is expected to rise rapidly to $340,000. Abbott is ambitious; it expects a real MARR of 12% per year. The inflation rate in the country has averaged 6.75% per year. From only an economic perspective, determine whether the company should purchase now or later (a) when inflation is not considered and (b) when inflation is considered.arrow_forwardBESTOIL company consumes 1,000,000 barrels of oil annually. Barrel of oil is traded at $ 49.25 in the spot market. Oil futures contracts with 1 year maturity are traded at USD 54.75 on the Chicago stock exchange. BESTOIL can borrow from banks at 7% annually and if the storage cost of oil is 1.5 USD for 1 barrel, what should the strategy of the firm be?arrow_forwardConsider a firm with a contract to sell an asset for $220,000 seven years from now. The asset costs $75000 to produce today. Given a relevant discount rate on this asset of 7.5 percent per year, will the firm make a profit on this asset? At what rate does the firm just break evenarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY