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You purchased 100 shares of stock in an oil company, Texas Energy, Inc., at $50 per share.

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You purchased 100 shares of stock in an oil company, Texas Energy, Inc., at $50 per share. The company has 1 million shares outstanding. Ten days later, Texas Energy announced an investment in an oil field in east Texas. The probability that the investment will be successful and generate an NPV of $10 million is 0.2; the probability that the investment will be a failure and generate an NPV of negative $1 million is 0.8. How would you expect the stock price to change upon the company’s announcement of the investment?

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The expected change in the stock price should be equal to the expected NP...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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