A project has a forecasted cash flow of $110 in year 1 and $121 in year 2.
Question:
A project has a forecasted cash flow of $110 in year 1 and $121 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of .5. If you use a constant risk-adjusted discount rate, what is
a. The PV of the project?
b. The certainty-equivalent cash flow in year 1 and year 2?
c. The ratio of the certainty-equivalent cash flows to the expected cash flows in years 1 and 2?
Step by Step Answer:
a PV b CEQ 1 105 110110 CEQ 1 ...View the full answer
Principles of Corporate Finance
ISBN: 978-0077404895
10th Edition
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
Related Video
The present value of future cash flows is calculated to determine the value today of a stream of future cash flows. It is calculated by discounting the future cash flows to their present value using a discount rate. The discount rate reflects the time value of money and the risk of the cash flows. It is important because it helps in making investment decisions, capital budgeting, loan decision making, and financial planning. By discounting future cash flows to their present value using a discount rate, it takes into account the time value of money and the risk associated with the cash flows. This allows investors, lenders, and financial planners to evaluate the viability of potential investments, projects, or loan applications, and to estimate the future value of investments or savings. calculating the present value of future cash flows is important in making investment decisions, capital budgeting, loan decision making, and financial planning. It helps to determine the viability of long-term projects, evaluate loan applications, and estimate the future value of investments or savings.
Students also viewed these Corporate Finance questions
-
Consider a government with a balanced primary budget. The interest rate is 5 percent. The growth rate of nominal GDP is 2 percent. The initial debt-GDP ratio is 10 percent. Over time, the debt to GDP...
-
In Minland in Problem 15, the interest rate is 4 percent a year. Suppose that real GDP decreases to $10 billion and the quantity of money supplied remains unchanged. Do people buy bonds or sell...
-
The interest rate is 1.6% per annum with discrete annual compounding. You want to create a principal protected note with a maturity of one year that is guaranteed to payout at least $2000, and also...
-
Fill in the Blanks The giant tubeworms found in the hydrothermal vents are called lack both a gut and a mouth. Instead, they have an organ called a (types of elements, e.g. potassium, sulfur,...
-
Write an equation that will produce the graph shown at right, with intercepts (5, 0), (2, 0), (1, 0), and (0, 60). -100
-
Much is made of the fact that certain mutual funds outperform the market year after year (that is, the return from holding shares in the mutual fund is higher than the return from holding a portfolio...
-
A limited company's total equity in its balance sheet was as follows: c What is a share premium? If the company had only ever made one issue of shares, what price was each share sold for? d Explain...
-
1. Explain to Todd the key reasons for purchasing mutual fund or ETF shares. 2. What special fund features might help Todd achieve his investment objectives? 3. What types of mutual funds or ETFs...
-
TUTORIAL 11 MARGINAL COSTING AND ABSORPTION COSTING Question 2 Charlassier Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no...
-
Mike Cichanowski founded Wenonah Canoe and later purchased Current Designs, a company that designs and manufactures kayaks. The kayak-manufacturing facility is located just a few minutes from the...
-
True or false? a. The company cost of capital is the correct discount rate for all projects, because the high risks of some projects are offset by the low risk of other projects. b. Distant cash...
-
The total market value of the common stock of the Okefenokee Real Estate Company is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock is...
-
Find examples of projects that have undergone major refactorings. What evidence was used to motivate or justify these refactorings?
-
The following information is available for Pioneer Company: Sales price per unit is $120. November and December sales were budgeted at 2,980 and 3,560 units, respectively. Variable costs are 12...
-
Describe and explain when should a frequent crane inspection occur?
-
Which distribution option do you feel gives PAC the best opportunity for future success? Compare and contrast the three options from the perspective of cost. which one do you believe will provide the...
-
Cookies needed 0/3 In the function below, steps 1-3 of the Function Design Recipe have been completed. Write the body of the function and then click Submit to test your function. def cookies_needed...
-
Christian had $49,679 of income from wages and $142 of taxable interest. Christian also made contributions of $2,800 to a tax-deferred retirement account. Christian has 0 dependents and files as...
-
By accessing the IMF monthly Financial Statistics and other pertinent websites: a. Compute for 2012 the ratio of the market capitalization of the Caracas (Venezuela) stock exchange to the country...
-
The process of collaborative goal setting by a manager and subordinate, the extent to which goals are accomplished is a major factor in evaluating and rewarding the subordinate's performance. It is...
-
Comment on the following statement: Investors dont care about the variability of a stocks returns, because they have the same chance of falling below the median as above the median. Therefore, on...
-
Dr. Sawicki obtained a variable-rate loan of $10,000. The lender required payment of at least $2000 each year. After nine months the doctor paid $2500, and another nine months later she paid $3000....
-
Follow the instructions in the NET @ssets box earlier in this section to access the interactive chart named Future Value of $100 on the textbooks Web site. Use the chart to help you answer these...
-
Follow the instructions in the NET @ssets box earlier in this section to access the interactive chart named Future Value of $100 on the textbooks Web site. Use the chart to help you answer: a....
-
1. What happens to the Sec. 199A deduction if a qualified trade or business generates a loss? a. None of the choices presented are correct. b. If the net amount of the income, gain, deduction and...
-
On January 26, Bella Co. borrowed cash from Conrad Bank by issuing a 60-day note with a face amount of $76,800. Assume a 360-day year. a. Determine the proceeds of the note, assuming the note carries...
-
Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the...
Study smarter with the SolutionInn App