Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A company has developed a new smart clock. If the clock is successful, the present value of the payoff (at the time the product is
A company has developed a new smart clock. If the clock is successful, the present value of the payoff (at the time the product is brought to market) is $17 million. If the clock fails, the present value of the payoff is $5 million. If the clock goes directly to market, there is a 50 percent chance of success. Alternatively, the company can delay the launch by one year and spend $900,000 to test-market the clock. Test-marketing would allow the company to improve the clock and increase the probability of success to 75%. The appropriate discount rate is 10%. Should the company conduct test-marketing? No, because NPV is lower by $748,643 No, because NPV is lower by $559,164 Yes, because NPV is higher by $827,273 Yes, because NPV is higher by $674,350 Yes, because NPV is higher by $754,281 QUESTION 2 A company is an all equity firm and has a cost of capital of 10.5 percent. The company is considering switching to a debt-equity ratio of 1.20 with a pretax cost of debt of 6 percent. What will the firm's cost of equity be if the firm makes the switch? The tax rate is 25%. 14.24% 14.55% 14.78% 14.96% 15.17% 15.43%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started