PRINCIPLES OF CORPORATE FINANCE
13th Edition
ISBN: 9781264052059
Author: BREALEY
Publisher: MCG
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Chapter 9, Problem 23PS
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B&B has a new baby powder ready to market. If the firm goes directly to the market with
the product, there is only a 65 percent chance of success. However, the firm can
conduct customer segment research, which will take a year and cost $1.13 million. By
going through research, B&B will be able to better target potential customers and will
increase the probability of success to 80 percent. If successful, the baby powder will
bring a present value profit (at time of initial selling) of $18.3 million. If unsuccessful, the
present value payoff is $5.3 million. The appropriate discount rate is 13
percent. Calculate the NPV for the firm if it conducts customer segment research and if it
goes to market immediately. (Do not round intermediate calculations and enter your
answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
Market immediately
Research option
Should the firm conduct customer segment research or go to the market immediately?
O Market…
B&B has a new baby powder ready to market. If the firm goes directly to the market with
the product, there is only a 55 percent chance of success. However, the firm can
conduct customer segment research, which will take a year and cost $1.18 million. By
going through research, the company will be able to better target potential customers
and will increase the probability of success to 70 percent. If successful, the baby powder
will bring a present value profit (at time of initial selling) of $18.8 million. If unsuccessful,
the present value payoff is only $5.8 million. The appropriate discount rate is 15 percent.
Calculate the NPV for the firm if it goes to market immediately and if it conducts
customer segment research. (Do not round intermediate calculations and enter your
answers in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89.)
The McGregor Whisky Company is proposing to market diet scotch. The product will first be test-marketed for two years in southern California at an initial cost of $500,000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 60% chance that demand will be satisfactory. In this case, McGregor will spend $5 million to launch the scotch nationwide and will receive an expected annual profit of $700,000 in perpetuity. If demand is not satisfactory, diet scotch will be withdrawn.Once consumer preferences are known, the product will be subject to an average degree of risk, and therefore, McGregor requires a return of 12% on its investment. However, the initial test-market phase is viewed as much riskier, and McGregor demands a return of 20% on this initial expenditure.What is the NPV of the diet scotch project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars not…
Chapter 9 Solutions
PRINCIPLES OF CORPORATE FINANCE
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 - Definitions Define the following terms: a. Cost of...Ch. 9 - True/false True or false? a. The company cost of...Ch. 9 - Company cost of capital Quark Productions (Give...Ch. 9 - Company cost of capital The total market value of...Ch. 9 - Company cost of capital You are given the...Ch. 9 - Company cost of capital Nero Violins has the...Ch. 9 - WACC A company is 40% financed by risk-free debt....
Ch. 9 - WACC Binomial Tree Farms financing includes 5...Ch. 9 - Prob. 10PSCh. 9 - Measuring risk The following table shows estimates...Ch. 9 - Prob. 12PSCh. 9 - Asset betas Which of these projects is likely to...Ch. 9 - Asset betas EZCUBE Corp. is 50% financed with...Ch. 9 - Prob. 15PSCh. 9 - Prob. 16PSCh. 9 - Prob. 17PSCh. 9 - Fudge factors John Barleycorn estimates his firms...Ch. 9 - Prob. 19PSCh. 9 - Prob. 20PSCh. 9 - Certainty equivalents A project has a forecasted...Ch. 9 - Certainty equivalents A project has the following...Ch. 9 - Prob. 23PSCh. 9 - Beta of costs Suppose that you are valuing a...Ch. 9 - Fudge factors An oil company executive is...
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