It is the beginning of September and you have been offered the following deal to go...

Transcribed Image Text:

It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $3,000. However, if you cannot ski because the helicopters cannot fly due to bad weather, there is no snow, or you get sick, you do not get a refund. There is a 30% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and you are well, the vacation will cost you $5,200. You estimate that the pleasure you get from heli-skiing is worth $6,900 per week to you (if you had to pay more than that, you would choose not to go). If your cost of capital is 8% per year, should you book ahead or wait? You should because the NPV of this choice is $ (Round to two decimal places.) Suppose the current value of a dealership is $5.00 million and the first-year free cash flow is expected to be $500,000. What is the beta of a corporation whose only asset is a one-year option to open a dealership? What is the beta if the first year's cash flows are expected to be $700,000, so a working dealership is worth $7.00 million? Assume that the beta of the dealership is 2.0 and that the appropriate cost of capital for this investment is 12.0%. Also consider that the volatility and the risk-free rate are 40% and 5.0%, respectively. What is the beta of a corporation whose only asset is a one-year option to open a dealership? ..... The current value of the asset without the dividends is $ million. (Round to four decimal places.) Suppose your corporation owns an operating electric car dealership, together with one-year options to open five more. From a previous study, you know that the value of the operating dealership is $5.9 million and the value of a one-year call option is $1.17 million. Additionally, the beta of the operating dealership is 1.97, while the beta of the one-year option is 6.42. The appropriate cost of capital for this investment is 12.2%, while the risk-free rate and volatility are 5.1% and 37%, respectively. a. What is the value and beta of your firm if the expected first-year free cash flow for all dealerships is $590,000? (In this case, the value of an operating dealership is $5.9 million.) b. What is the value and beta of your firm if the expected first-year free cash flow for all dealerships is $330,000? (In this case, the value of an operating dealership is $3.3 million.) c. In which case do your options have higher beta? In which case does your firm have higher beta? Why? Your R&D division has just synthesized a material that will superconduct electricity at room temperature; you have given the go ahead to try to produce this material commercially. It will take five years to find out whether the material is commercially viable, and you estimate that the probability of success is 23%. Development will cost $10.1 million per year, paid at the beginning of each year. If development is successful and you decide to produce the material, the factory will be built immediately. It will cost $1,020 million to put in place and will generate profits of $100 million at the end of every year in perpetuity. Assume that the current five-year risk-free interest rate is 9.6% per year, and the yield on a perpetual risk-free bond will be either 12.2%, 9.7%, 8.5%, or 5.1% in five years. Assume that the risk-neutral probability of each possible rate is the same. What is the value today of this project? What is the value of the development opportunity today? ..... The value is $ million. (Round to one decimal place.) You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25.98 share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of one year, it will buy the shares back from you for $25.98 per share if you desire. Suppose the curr one-year risk-free rate is 6.19%, the volatility of JCH stock is 30.8%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed. a. Is this offer worth more than $25.98 million? Explain. b. What is the value of the offer? a. Is this offer worth more than $25.98 million? Explain. (Select the best choice below.) A. The offer is worth more than $25.98 million because you might be able to sell the shares at a higher price. B. The offer is worth exactly $25.98 million because that is the price of the shares today. C. The offer is worth less than $25.98 million because of the put option. D. The offer is worth more than $25.98 million because of the put option. ..... It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $3,000. However, if you cannot ski because the helicopters cannot fly due to bad weather, there is no snow, or you get sick, you do not get a refund. There is a 30% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and you are well, the vacation will cost you $5,200. You estimate that the pleasure you get from heli-skiing is worth $6,900 per week to you (if you had to pay more than that, you would choose not to go). If your cost of capital is 8% per year, should you book ahead or wait? You should because the NPV of this choice is $ (Round to two decimal places.) Suppose the current value of a dealership is $5.00 million and the first-year free cash flow is expected to be $500,000. What is the beta of a corporation whose only asset is a one-year option to open a dealership? What is the beta if the first year's cash flows are expected to be $700,000, so a working dealership is worth $7.00 million? Assume that the beta of the dealership is 2.0 and that the appropriate cost of capital for this investment is 12.0%. Also consider that the volatility and the risk-free rate are 40% and 5.0%, respectively. What is the beta of a corporation whose only asset is a one-year option to open a dealership? ..... The current value of the asset without the dividends is $ million. (Round to four decimal places.) Suppose your corporation owns an operating electric car dealership, together with one-year options to open five more. From a previous study, you know that the value of the operating dealership is $5.9 million and the value of a one-year call option is $1.17 million. Additionally, the beta of the operating dealership is 1.97, while the beta of the one-year option is 6.42. The appropriate cost of capital for this investment is 12.2%, while the risk-free rate and volatility are 5.1% and 37%, respectively. a. What is the value and beta of your firm if the expected first-year free cash flow for all dealerships is $590,000? (In this case, the value of an operating dealership is $5.9 million.) b. What is the value and beta of your firm if the expected first-year free cash flow for all dealerships is $330,000? (In this case, the value of an operating dealership is $3.3 million.) c. In which case do your options have higher beta? In which case does your firm have higher beta? Why? Your R&D division has just synthesized a material that will superconduct electricity at room temperature; you have given the go ahead to try to produce this material commercially. It will take five years to find out whether the material is commercially viable, and you estimate that the probability of success is 23%. Development will cost $10.1 million per year, paid at the beginning of each year. If development is successful and you decide to produce the material, the factory will be built immediately. It will cost $1,020 million to put in place and will generate profits of $100 million at the end of every year in perpetuity. Assume that the current five-year risk-free interest rate is 9.6% per year, and the yield on a perpetual risk-free bond will be either 12.2%, 9.7%, 8.5%, or 5.1% in five years. Assume that the risk-neutral probability of each possible rate is the same. What is the value today of this project? What is the value of the development opportunity today? ..... The value is $ million. (Round to one decimal place.) You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25.98 share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of one year, it will buy the shares back from you for $25.98 per share if you desire. Suppose the curr one-year risk-free rate is 6.19%, the volatility of JCH stock is 30.8%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed. a. Is this offer worth more than $25.98 million? Explain. b. What is the value of the offer? a. Is this offer worth more than $25.98 million? Explain. (Select the best choice below.) A. The offer is worth more than $25.98 million because you might be able to sell the shares at a higher price. B. The offer is worth exactly $25.98 million because that is the price of the shares today. C. The offer is worth less than $25.98 million because of the put option. D. The offer is worth more than $25.98 million because of the put option. .....