A new project has the following success probabilities: Failure 10% $50 Success 85% $200 Buyout 5%...

 

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A new project has the following success probabilities: Failure 10% $50 Success 85% $200 Buyout 5% $400 Prob Payoff (in millions) Assume risk neutrality. If a bond with $100 face value collateralized by this project promises an interest rate of 8%, then what is the prevailing cost of capital, and what do shareholders receive if the buyout materializes? You are attempting to decide if a particular retail stock, trading at $20, is priced appropriately. You know with certainty there is a 24% chance the company will have a booming sales year, driving the stock price to $45. You also know there is 50% chance sales will stagnate, keeping the stock price at $20. Lastly, there is a 26% chance the company will lose market share to a new competitor this year, driving the price down to $10. Is there an opportunity for expected gain in this stock, and if so, how much (i.e., report the net gain if so, 0 otherwise)? A $16 stock has the following probability distribution with associated outcomes after 1 year: $12 with prob 10%; $15 with prob 20%; $16 with prob 40%; $18 with prob 20%; and $20 with prob 10%. What is the expected value of the stock price at the end of year 1? If the prevailing interest rate is 2%, is this a good investment? Report the positive difference between the expected stock price and how much you would have if you invested the money at the fixed interest rate. A new project has the following success probabilities: Failure 10% $50 Success 85% $200 Buyout 5% $400 Prob Payoff (in millions) Assume risk neutrality. If a bond with $100 face value collateralized by this project promises an interest rate of 8%, then what is the prevailing cost of capital, and what do shareholders receive if the buyout materializes? You are attempting to decide if a particular retail stock, trading at $20, is priced appropriately. You know with certainty there is a 24% chance the company will have a booming sales year, driving the stock price to $45. You also know there is 50% chance sales will stagnate, keeping the stock price at $20. Lastly, there is a 26% chance the company will lose market share to a new competitor this year, driving the price down to $10. Is there an opportunity for expected gain in this stock, and if so, how much (i.e., report the net gain if so, 0 otherwise)? A $16 stock has the following probability distribution with associated outcomes after 1 year: $12 with prob 10%; $15 with prob 20%; $16 with prob 40%; $18 with prob 20%; and $20 with prob 10%. What is the expected value of the stock price at the end of year 1? If the prevailing interest rate is 2%, is this a good investment? Report the positive difference between the expected stock price and how much you would have if you invested the money at the fixed interest rate.

Answer rating: 100% (QA)

Answer 1 The prevailing cost of capital for the project is 8 which is the same as the interest rate ... View the full answer