1. In December 2008, your company faces a decision to bid for a eight-year lease on...

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1. In December 2008, your company faces a decision to bid for a eight-year lease on a coal mine offered by the government. The lease gives the winner of the auction the right to actually develop the mine for two years. Once development takes place (if ever at all), the leaseholder can extract 25 million tons of coal per year for exactly four years with the fixed extraction cost of $4 per ton. Development of the mine costs $50 million. There are reclamation costs of $2 million at the end of the life of the mine. If development did not take place by December 2012 (four years down the road), then the lease would end at that time. At the time of the auction, the spot price of coal was $4.58. The risk-free rate of interest is 6% per year and the net convenience yield on coal is 3.5% per year, both of which are constant and compounded continuously. The standard deviation of log changes in coal prices is 15% per year. Development costs are depreciated on a straight-line basis over four years. There are no net working capital requirements. The marginal tax rate of your company is 40%. There is no inflation. (a) Suppose that your company commits to an immediate development of the mine. What is the maximum amount that your company should bid in the auction for the lease? (b) Build a four-step binomial tree with a time step set equal to one year, taking the adjustments of the convenience yield into account. Calculate the value of the lease by the real options approach. (c) Build a four-step binomial tree with a time step set equal to one year, ignoring the convenience yield. Calculate the value of the lease by the real options approach. (d) Are the values in parts (b) and (c) different? Why and why not? on X + Quicquiz probud-ONAPCOAS01010000 1. Pricing foreign goods 40200400008chsmedcalle1-0003&ck-8_149199882 110% Aa Aa The exchange rate is the price of one currency in terms of another currency. An exchange rate specifies how many 1. Pricing foreign goods Aa Aa Search The exchange rate is the price of one currency in terms of another currency. An exchange rate specifies how many units of one country's currency equal one unit of another country's currency. Foreign Currency Brazilian real (R$) Canadian dollar (CDNS) Euro (C) Japanese yen (V) Mexican peso (MEX$) UK pound (E) Suppose the following table forecasts exchange rate data for November 26, 2014, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. U.S. Dollars ($) per Unit of Foreign Currency 0.3666 0.8493 1.3288 0.009748 0.0889 1.8965 Suppose that on November 26, 2014, a children's doll handmade in Japan is priced at 1,000. The approximate U.S. dollar price of the doll would be If the exchange rate for the U.S. dollar-Japanese yen falls from the rate given by the table to $0.0047 per yen, the value of the U.S. dollar relative to the yen. Pierre is 24 years old and has always lived in Quebec. Upon graduation from Concordia last year, he landed a fantastic full-time job and decided to spend his pay cheques on buying a BMW for his first car. He needed a car as his girlfriend lives in New York City and he drives every weekend to visit her. Complete the sentence by inserting the correct word and/or calculation for this mini-case. Highlight and underline your response. and the For car insurance, due to Pierre's insurance he pays very high of $2,000 which He decided on having a very high helped reduce his car insurance costs but knows he would have to pay this before his insurance company would cover the rest of the claim if he got into an accident and was determined for the collision. Pierre knows that in Quebec, the insurance is regardless of who is responsible for the accident. He also knows that every province recognizes that it is critical for drivers to have adequate coverage as you can be held responsible for any amounts above your policy limit; in Quebec, you must have at least $ in coverage. Since Pierre took FINA 200 during his studies, he wisely knew to increase this coverage to $2 million when driving outside of Quebec (i.e. in some other provinces and in the US), as an injured party has the right to for pain and suffering. In addition, Pierre purchased Medical Insurance for his trips to the US, as he knew that his provincial health insurance coverage for emergency medical costs outside the province only covered up to the rates in effect in Quebec. Since costs outside of Quebec are often much higher, having good coverage is critical. Pierre also has Disability Insurance through his employer where the monthly disability benefit amount would be 70% of his Pre-Disability Income at the time of a claim. He currently earns a gross annual salary of $90,000. If Pierre were to become disabled, he knows that the bills would continue to come in but not a salary. He takes comfort knowing that he could cover his mortgage and bills with the amount of a monthly disability benefit of $ 1. In December 2008, your company faces a decision to bid for a eight-year lease on a coal mine offered by the government. The lease gives the winner of the auction the right to actually develop the mine for two years. Once development takes place (if ever at all), the leaseholder can extract 25 million tons of coal per year for exactly four years with the fixed extraction cost of $4 per ton. Development of the mine costs $50 million. There are reclamation costs of $2 million at the end of the life of the mine. If development did not take place by December 2012 (four years down the road), then the lease would end at that time. At the time of the auction, the spot price of coal was $4.58. The risk-free rate of interest is 6% per year and the net convenience yield on coal is 3.5% per year, both of which are constant and compounded continuously. The standard deviation of log changes in coal prices is 15% per year. Development costs are depreciated on a straight-line basis over four years. There are no net working capital requirements. The marginal tax rate of your company is 40%. There is no inflation. (a) Suppose that your company commits to an immediate development of the mine. What is the maximum amount that your company should bid in the auction for the lease? (b) Build a four-step binomial tree with a time step set equal to one year, taking the adjustments of the convenience yield into account. Calculate the value of the lease by the real options approach. (c) Build a four-step binomial tree with a time step set equal to one year, ignoring the convenience yield. Calculate the value of the lease by the real options approach. (d) Are the values in parts (b) and (c) different? Why and why not? on X + Quicquiz probud-ONAPCOAS01010000 1. Pricing foreign goods 40200400008chsmedcalle1-0003&ck-8_149199882 110% Aa Aa The exchange rate is the price of one currency in terms of another currency. An exchange rate specifies how many 1. Pricing foreign goods Aa Aa Search The exchange rate is the price of one currency in terms of another currency. An exchange rate specifies how many units of one country's currency equal one unit of another country's currency. Foreign Currency Brazilian real (R$) Canadian dollar (CDNS) Euro (C) Japanese yen (V) Mexican peso (MEX$) UK pound (E) Suppose the following table forecasts exchange rate data for November 26, 2014, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. U.S. Dollars ($) per Unit of Foreign Currency 0.3666 0.8493 1.3288 0.009748 0.0889 1.8965 Suppose that on November 26, 2014, a children's doll handmade in Japan is priced at 1,000. The approximate U.S. dollar price of the doll would be If the exchange rate for the U.S. dollar-Japanese yen falls from the rate given by the table to $0.0047 per yen, the value of the U.S. dollar relative to the yen. Pierre is 24 years old and has always lived in Quebec. Upon graduation from Concordia last year, he landed a fantastic full-time job and decided to spend his pay cheques on buying a BMW for his first car. He needed a car as his girlfriend lives in New York City and he drives every weekend to visit her. Complete the sentence by inserting the correct word and/or calculation for this mini-case. Highlight and underline your response. and the For car insurance, due to Pierre's insurance he pays very high of $2,000 which He decided on having a very high helped reduce his car insurance costs but knows he would have to pay this before his insurance company would cover the rest of the claim if he got into an accident and was determined for the collision. Pierre knows that in Quebec, the insurance is regardless of who is responsible for the accident. He also knows that every province recognizes that it is critical for drivers to have adequate coverage as you can be held responsible for any amounts above your policy limit; in Quebec, you must have at least $ in coverage. Since Pierre took FINA 200 during his studies, he wisely knew to increase this coverage to $2 million when driving outside of Quebec (i.e. in some other provinces and in the US), as an injured party has the right to for pain and suffering. In addition, Pierre purchased Medical Insurance for his trips to the US, as he knew that his provincial health insurance coverage for emergency medical costs outside the province only covered up to the rates in effect in Quebec. Since costs outside of Quebec are often much higher, having good coverage is critical. Pierre also has Disability Insurance through his employer where the monthly disability benefit amount would be 70% of his Pre-Disability Income at the time of a claim. He currently earns a gross annual salary of $90,000. If Pierre were to become disabled, he knows that the bills would continue to come in but not a salary. He takes comfort knowing that he could cover his mortgage and bills with the amount of a monthly disability benefit of $

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a To determine the maximum amount that your company should bid in the auction for the lease you need to calculate the net present value NPV of the pro... View the full answer