Imagine that a start-up firm plans to open private dining clubs on college campuses. The test...
Fantastic news! We've Found the answer you've been seeking!
Question:
![image text in transcribed](https://s3.amazonaws.com/si.experts.images/answers/2024/05/6648d39581b3d_7886648d3949e8b0.jpg)
Transcribed Image Text:
Imagine that a start-up firm plans to open private dining clubs on college campuses. The test market will be your campus, and if the concept proves successful, expansion will follow nationwide. Nationwide expansion will occur in year 4. If the firm expands, it projects opening 20 dining clubs in year 4 around the nation. The start-up cost of the test dining club is $14000 (this covers leaseholder improvements and other expenses for a vacant restaurant near campus). Assume projected revenues are only sufficient to exactly cover variable and fixed costs (excluding depreciation) and thus the only cashflows over the first 4 years are tax shields from depreciation. Also assume that the up-front costs can be depreciated in 4 years in a straight-line manner. The volatility of the underlying asset is 30% per annum. The interest rate available is 5% and the tax rate is 34%. What is the value of the option to expand (keep two decimal places)? Your Answer Imagine that a start-up firm plans to open private dining clubs on college campuses. The test market will be your campus, and if the concept proves successful, expansion will follow nationwide. Nationwide expansion will occur in year 4. If the firm expands, it projects opening 20 dining clubs in year 4 around the nation. The start-up cost of the test dining club is $14000 (this covers leaseholder improvements and other expenses for a vacant restaurant near campus). Assume projected revenues are only sufficient to exactly cover variable and fixed costs (excluding depreciation) and thus the only cashflows over the first 4 years are tax shields from depreciation. Also assume that the up-front costs can be depreciated in 4 years in a straight-line manner. The volatility of the underlying asset is 30% per annum. The interest rate available is 5% and the tax rate is 34%. What is the value of the option to expand (keep two decimal places)? Your Answer
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
All of the following represent trends shaping HR over the past decade, according to our reading, except: Organizations are spending more on the expansion of physical office space Employees are...
-
Susan Jungclaus Peterson was a twenty-one-year-old student at Moorhead State University who had lived most of her life on her family farm in Minnesota. Though Susan was a deans list student during...
-
Calculate the standard free-energy change and the equilibrium constant Kp for the following reaction at 25 C. See Table 18.2 for data. CO(g) 3H2(g) CH4(g) H20(g)
-
You have been asked by the prospective directors of a shortly to be established business what is meant by ordinary shares, preference shares and debt capital. Further, you have been asked to provide...
-
Dr. Sherry Bird is employed by Dental Associates. Dental Associates recently installed a computerized job-order costing system to help monitor the cost of its services. Each patient is treated as a...
-
1 . What is the goal of this review paper and why do the authors consider it important?
-
A company has the following inventory information and uses the periodic system: June 1 7 units at $3 each June 10 10 units at $4 each June 11 Sale 9 units June 14 Sale 6 units The company uses the...
-
Public safety a problem needing perspective By Spencer van Vloten | Opinion | April 24th 2023 Public safety is an emotionally and politically charged issue, but how much cause for concern is there...
-
How the primary goal of stock pricemaximization may be incompatible and or conflicting with issues related to social responsibility of corporations?
-
1 10. Given x = t + and y = t - find the following: (ylleadhav to ylle nos oil bed a. For what values of t does the curve have a slope of 4? b. Find C. dy dx (14 44 Use the second derivative to...
-
11. Determine the exact length of the curve defined by x = et cos(t) and y = et sin(t) from 0t4 (14 pts)
-
A superannuation fund receives an amount of $430 at the end of each fortnight from one of its members. It invests this amount for the member in a cash fund that pays 6.2% p.a. compounded fortnightly....
-
The cell phone industry is very competitive. Two companies in the greater Lubbock area, Horizon and Local Cellular, are constantly battling each other in an attempt to control the market. Each...
-
In order to get an idea on current buying trends, a real estate agent collects data on 10 recent house sales in the area. Specifically, she notes the number of bedrooms in each house as follows: a....
-
You have an opportunity to invest in a concession at a world exposition. LOS To use the building and exhibits more fully, the venture is expected to cover a six-year period consisting of a...
-
Below is a list of aspects of various capital expenditure proposals that the capital budgeting team of Modern Systems, Inc., has incorporated into its net present value analyses during the past year....
-
Critic Ivor Smallbrain is watching the classic film 11. \(\overline{9}\) Angry Men. But he is bored, and starts wondering idly exactly which rational numbers \(\frac{1}{n}\) have decimal expressions...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App