PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Textbook Question
Chapter 9, Problem 21PS
Certainty equivalents A project has the following
The estimated project beta is 1.5. The market return rm is 16%, and the risk-free rate rf is 7%.
- a. Estimate the
opportunity cost of capital and the project’s PV (using the same rate to discount each cash flow). - b. What are the certainty-equivalent cash, flows in each year?
- c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
- d. Explain why this ratio declines.
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A project has the following forecasted cash flows: Cash Flows ($ thousands) C0 C1 C2 C3 −180 +120 +140 +130 The estimated beta is 1.56. The market return is 16%, and the risk-free rate is 4%. a. Estimate the cost of capital for the project and the project’s PV. b. What are the certainty equivalent cash flows in each year? c. What is the ratio of the certainty-equivalent cash flow to the expected cash flow in each year?
The data related to a project with an investment amount of 10.000.000 TL is as follows, and the risk-free discount rate is 10%.
YEAR1
YEAR2
Possibility
Cash Flows
Possibility
Cash Flows
%20
3.000.000
%25
5.000.000
%60
7.000.000
%50
8.000.000
%20
8.000.000
%25
9.000.000
Calculate the expected Net Present Value of the project and the Standard Deviation of its Net Present Value based on these data.
A project with an initial cost of GH¢ 500,000 has the following forecasted cash inflows:
Year
Cashflows (GH¢)
1
150,000
2
200,000
3
250,000
4
300,000
5
320,000
The estimated project beta is 1.2. The market return is 19%, and the risk-free rate is 10%.
Required:
1. Compute the opportunity cost of capital and the project’s Present Value (
2. Indicate the annual Certainty Equivalent cash flow to the expected cashflow in each case?
3. What is the ratio of Certainty Equivalent cashflow to the expected cashflow in each case?
4. What is the meaning of this ratio? and Why does this ratio declines?
Chapter 9 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 9 - (VAR.P and STDEV.P) Choose two well-known stocks...Ch. 9 - (AVERAGE, VAR.P and STDEV.P) Now calculate the...Ch. 9 - (SLOPE) Download the Standard Poors index for the...Ch. 9 - Company cost of capital Suppose a firm uses its...Ch. 9 - Prob. 2PSCh. 9 - Definitions Define the following terms: a. Cost of...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 6PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Asset betas Which of these projects is likely to...
Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - Measuring risk The following table shows estimates...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Measuring risk Look again at Table 9.1. This time...Ch. 9 - Prob. 16PSCh. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 18PSCh. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 22PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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- Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the projects NPV is 12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The companys CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis: What are the projects expected NPV, standard deviation, and coefficient of variation?arrow_forwardA project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following: What is the PV of the project? What is the certainty-equivalent cash flow in year 1 and year 2? What is the ratio of the certainty-equivalent cash flows to the expected cash?arrow_forwardSuppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: -$6,800 $ 1,010 $2,210 $1,410 $1,410 $1,210 $ 1,010 Use the IRR decision rule to evaluate this project. IRR %?arrow_forward
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