ZuoTi.Pro
Question

Lima Inc. can choose between two mutually exclusive projects. At the moment the company has an outstanding zero-coupon bond with face value $2,300,000 and maturity one year. Assume that all agents are risk neutral, that debt holders are conpetitive and that the risk-free rate is 3.00%. The project chosen will be completed in one year, and after that the company will terminate its operations and close. The economic conditions in the upcoming year can be either good or bad. The first project has a low payoff volatility, and the second has a high payoff volatilitv. The pavoff characteristics are reported in the table below: Situation Bad GOOd ProbabilityLow Volatility Project Payoff 0.6 0.4 2,500,000 3,750,000 High Volatility Project Payoff 1,400,000 5,250,000 (a) What is the value of the firm at time 0 if the high volatility project is undertaken? What is the value of the firm at time 0 if the low volatility project is undertaken? Which project maximizes the value of the firm at time 0? VH 2, 854, 368.93; VL2, 912, 621.36 (b) What is the value of the firms equity at time 0 if the high volatility project is undertaken? What is the value of the firms equity at time 0 if the low volatility project is undertaken? Which project will be chosen by the management of Lima, if they work in the interest of the equity holders? EH 1, 145, 631.07; EL 679 61 1.651 (c) What is the market value of the zero-coupon bond at time 0? 1,708,737.86

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

projects (Autosaved) (Autosaved) (Autosaved) Microsoft Excel Home Insert Page Layout Formls Data Review View Add-Ins Cut Σ AutoSum .11.A. A--|- ー E ゴText 9- Wrap Text General calibn Copy Conditional Format Cell Insert Delete Format Formatting as Table Styles2 Clear Paste Format Painter B l U. -...Δ.-=-- Merge & Center. $ , % , , , Clipboard FE124 EW 115 PART 1 Font Styles Edting Formula Bar EX EY EZ FA FB I113 FD LOW VOLATILITY PROJECT PAY OFF PROBABILITY EBIT PAYOFF TO BOND HOLDERS PAYOFF TO STOCK HOLDERS BAD GOOD 116 0.4 2500000 2300000 200000 3750000 2300000 AS BOND HOLDERS ARE PAID FIRST, 1450000 THE AMOUNT LEFT WILL BE PAID TO STOCK HOLDERS 118 119 120 121 122 123 124 125 PART 2 HIGH VOLATILITY PROJECT PAY OFF BAD 126 127 128 129 130 131 132 133 11 1 トト | IRRnpv RATION PBP ARR ( external rate / MIRR NPV 1RR VALUE OF EQUITY VALUE OF DEBT [0.60 (200000)+0.40 (1450000)1/1.03 [0.80 (2300000)0.20 (2300000)1/1.03- 679611.65 2233009.71 2912621.36 VALUE OF FIRM (AT t-0) GOOD PROBABILITY EBIT PAYOFF TO BOND HOLDERS PAYOFF TO STOCK HOLDERS 1400000 1400000 4D 0.4 5250000 2300000 2950000 0 VALUE OF EQUITY VALUE OF DEBT- VALUE OF FIRM (AT t 0) [0.60 (0)+0.40 (2950000)1/1.03 [0.60 (1400000)0.40 (2300000)1/1.03 1145631.07 1708737.86 2854368.93 REPLACEMENT S - HPR GMAM EAC MACRS RATIOS CASH BUDGETwacc BOND EPS EBIT REPLACEMENT erences: CO36 20-10-2018

0 0
Add a comment
Know the answer?
Add Answer to:
Lima Inc. can choose between two mutually exclusive projects. At the moment the company has an...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Sheaves must choose between two mutu...

    Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Sheaves must choose between two mutually exclusive projects. Assume that the project Sheaves chooses will be the firm’s only activity and that the firm will close one year from today. Sheaves is obligated to make a $3,600 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities....

  • Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally...

    Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm's only activity and that the firm will close one year from today. The firm is obligated to make a $4,300 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following...

  • Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally...

    Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm's only activity and that the firm will close one year from today. The firm is obligated to make a $4,400 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following...

  • Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally...

    Sheaves Corporation economists estimate that a good business environment and a bad business environment are equally likely for the coming year. Management must choose between two mutually exclusive projects. Assume that the project chosen will be the firm's only activity and that the firm will close one year from today. The firm is obligated to make a $5,300 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following...

  • Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally...

    Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm's only activity and that the firm will close one year from today. The company is obligated to make a $3,800 payment to bondholders at the end of the year. The projects have the same systematic risk...

  • Question 33 5 pts Fountain Corporation's economists estimate that a good business environment and a bad...

    Question 33 5 pts Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm's only activity and that the firm will close one year from today. The company is obligated to make a $3,800 payment to bondholders at the end of the year. The projects have...

  • Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally...

    Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the company's only activity and that the company will close one year from today. The company is obligated to make a $5,100 payment to bondholders at the end of the year. The projects have the same systematic risk...

  • 0.5 points Fountain Corporation's economists estimate that a good business environment and a bad business environment...

    0.5 points Fountain Corporation's economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the company's only activity and that the company will close one year from today. The company is obligated to make a $4.400 payment to bondholders at the end of the year. The projects have the same...

  • (b) A company is evaluating between two mutually exclusive projects. The required initial investments and the...

    (b) A company is evaluating between two mutually exclusive projects. The required initial investments and the expected net cash flows from the projects are as follows: Project 1 Project 2 0 -$4,000,000 - $4,000,000 1 $1,900,000 $1,100,000 2 $2,255,000 $1,900,000 3 $2,000,000 $2,000,000 The company accepts any project for which the payback period is within 3 years, Which of these projects should be chosen using the payback period as the capital budgeting measure? (3 marks) An Australian multinational company is...

  • Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown...

    Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT