The Pampa Oil Company operates oil and gas exploration throughout the panhandle of Texas. The firm recently was approached by a wildcatter named William "Wild Bill" Donavan with the prospect to develop what he thought was a sure thing. Wild Bill owned the lease and wanted to sell it to Pampa to meet some rather pressing gambling
One reason that writing options can be a viable and profitable investment strategy is that a. the option writer collects the quarterly dividends. b. an option writer can exercise the option to avoid a potential loss. c. an option writer determines when the option is exercised. d. most options ex
A company currently pays a dividend of $2 per share, D0=2. It is estimated that the company's dividend will grow at a rate of 20 percent per year for the next 2 years, then the dividend will grow at a constant rate of 7 percent thereafter. The company's stock had a beta equal to 1.2, the risk free rate is 7.5 percent, and the ma
The traditional practice of resolving uncertainies by chosing an asset valuation at the lower range of reasonableness is known as: factoring, conservatism, default, or market to market?
1.- Why many argue that historical costs should no longer be used in accounting because they are not relevant? 2.- Why many other argue that departing from historical cost introduces too much subjectivity into accounting? EXPLAIN THE 2 ANSWERS AND PROVIDE A DEFENSE OF BOTH POINTS OF VIEW and then explain why FASB chose to d
Moon Shine: evaluate expansion options Minimum price the owner of the division should consider for its sale and maximum price the acquire should be willing to pay.
Moon Shine has decided to expand into related business. Management estimates that to build a facility of the desired size and to attain capacity operations would cost $ 285 million in present value terms Alternatively, the firm could acquire an existing division with the desired capacity. One such opportunity is the division
A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1 = 0.50), and it should continue to grow at a constant rate of 7 percent a year. If its required return is 12 percent, what is the stock's expected price 4 years from today? A stock is expected to pay a dividend of $1 at the end of the year. T
Stock A has a beta of 1.1 and an expected return of 12%. Stock B has a beta of .92 and an expected return of 10.25%. The risk-free rate is 3.5% and the expected return on the market is 11%.Are these stocks correctly priced? Why or why not? 1. No; Stock A is underpriced and stock B is overpriced. 2. No; Stock A is overprice
Please provide an explanation for the correct choice. Which of the following is an example of a flexibility option? A. A company has the option to invest in a project today or to wait a year. B. A company has the option to back out of a project that turns out to be unproductive. C. A company pays a higher cost today
Explain why valuation might be described as a "fickle" process to a stockholder. What factors tend to make the process fickle, and what factors tend to make it more predictable?
Gerald's Travel Service just paid $1.79 to its shareholders as the annual dividend. Simultaneously, to company announced that future dividends will be increased by 3.2 %. If you require a 10.5% rate of return, how much are you willing to pay to purchase one share of this stock?
You own a one-year call option on one acre of Los Angeles real estate. The exercise price for your option is $2,000,000. The current appraised market value of the land underlying your option is $1,700,000. The land is currently being used as a parking lot, generating just enough cash flow to cover the property taxes currently be
Kimar, Inc. was in an excellent position to take advantage of liberalized casino gambling laws in Arizona and, as a result, is experiencing an annual growth rate of 35%. After 4 years this growth rate is expected to decline to 12% per year as other competitors enter the industry. Stockholders require an 18% return on stocks with
Bollinger currently pays a dividend of $2.00 a share. Dividends are expected to grow at a rate of 12% per year for the next 5 years and then continue growing thereafter (indefinitely) at a rate of 6% per year. What is the current value of a share of Bollingers stock to an investor who requires a 15% required rate of return?
Suppose a firm just paid a dividend of $10 per share. Future dividends are expected to increase at a 5% annual rate.
How do I calculate this example problem below? Suppose a firm just paid a dividend of $10 per share. Future dividends are expected to increase at a 5% annual rate. The required return is 25% per year. The value of the firm is estimated as:
Companies often have to increase their investment costs to obtain real options. Why might this be so, and how could a firm decide if it was worth the cost to obtain a given real option?
Discuss the various stock valuation methods and the relevant factors that affect the valuation process. Which factor(s) have the most bearing on stock price?
P0 = Price of the stock today D1 = Dividend at the end of the first year D0 = (1 _ g) D0 = Dividend today Ke = Required rate of return g =Constant growth rate in dividend D0 is currently $3.00, Ke is 10 percent, and g is 5 percent Under Plan A, D0 would be immediately increased to $3.40 and Ke and g will remain uncha
Decision tree analysis shows a project to have several possible outcomes the best of which has an NPV of $10M calculated over a five year life. This best case path has an overall probability of occurring of 25%. A real option is available at an initial cost of $750,000 which will add a single $5M cash inflow to this best case pa
Discuss some of the positive and negative evidence used to establish the need for a valuation allowance for a tax loss carryforward. Also, indicate the effect of the valuation allowance on the free cash flow forecast.
1. If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gain yield be influenced by the firm's decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain. 2. C
Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions. "It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we do
Highland Cable Company is considering an expansion of its facilities. Its current income statement is as follow Sales $4,000,000 Less: Variable expense (50% of sales) 2,000,000 Fixed expense 1,500,000 Earnings before interest and taxes (EBIT) 500,000 Interest (10% cost) 140,000 Earnings before taxes (EBT) 360,000 Tax
Solve the following: A) Thomas Brothers is expected to pay a $.50 per share dividend at the end of the year (i.e., D1= $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, Rs, is 15%. What is the value per share of the company's stock? B) Fee Founders
Mini Case a & c Pages 614-615 a. What is a real option? What is a financial option? What is the single most important characteristic of an option? c. Consider Tropical Sweets' call option with a $25 strike price. The following table contains historical values for this option at different stock prices: Stock Price C
Stock options exercisable at $50 per share to obtain 24,000 shares of common stock were outstanding dw period when the average market price of the common stock was $60 and the ending market price was $55. Required By how many shares will the assumed exercise of these options increase the weighted-a" number of shares out
Explain these financial theories. Liquidity risk and Option pricing theory.
Problem: Benjamin O'Henry has owned and operated O'Henry's Data Services since its beginning ten years ago. From all appearances, the business has prospered. In the past few years, you have become friends with O'Henry and his wife. Recently, O'Henry mentioned that he has lost his zest for the business and would conside
Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions. "It is impossible to use DCF (Discounted cash flow) methods for evaluating investments in research and development. There are no cost saving