I have 22 multiple questions related to Corporate Finance.

You obtain the following data for year 1: Revenue = $43; Variable costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the operating cash flow for the project for year 1. $7 $10 $13 $16 Indicate whether the following statements are true or false. a. The approval of a capital budget allows managers to go ahead with any project included in the budget. True False b. Capital budgets and project authorizations are mostly developed \"bottom up.\" Strategic planning is a \"top-down\" process. True False c. Project sponsors are likely to be overoptimistic. True False A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60% of revenues. (Assume all revenues and costs occur at year-end, i.e.,t = 1, t = 2, and t = 3.) The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 30% and the cost of capital is 15%. Cash flows from the project are: CF0: -90,000; CF1: 12,600; CF2: 12,600; CF3: 29,600. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 59,600. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600. CF0: -100,000; CF1: 42,600; CF2: 42,600; CF3: 49,600. You calculate the following estimates of project cash flows: The revenues and costs occur in perpetuity, as opposed to the initial investment. The cost of capital is 8%. What does a sensitivity analysis of NPV (without taxes) show? (Answers appear in order: [Pessimistic, Most Likely, Optimistic].) 25.00, +232.50, +440.00 -100.00, +500.00, +800.00 -90.00, -55.00, -20.00 -88.33, -50.00, -18.50 The following are drawbacks of sensitivity analysis EXCEPT: it can provide ambiguous results. the underlying variables are likely interrelated. it can help identify the project's most important variables. all of these statements are drawbacks of sensitivity analysis. Project analysis, beyond simply calculating NPV, includes the following procedures: I) sensitivity analysis; II) break-even analysis; III) Monte Carlo simulation; IV) scenario analysis I only I and II only I, II, and III only I, II, III, and IV Otobai Company in Osaka, Japan is considering the introduction of an electrically powered motor scooter for city use. The scooter project requires an initial investment of 16.9 billion. The cost of capital is 8%. The initial investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%. Consider the following estimates for the scooter project. Market size Market share Unit price Unit variable cost 1.29 million 0.1 590,000 550,000 Fixed cost 2.19 billion What is the NPV of the electric scooter project? (Negative amount should be indicated by a minus sign. Enter your answer in billions. Do not round intermediate calculations. Round your answer to 2 decimal places.) Otobai is considering still another production method for its electric scooter. It would require an investment of 15.10 billion in addition to the initial investment of 15.10 billion but would reduce variable costs by 42,000 per unit. The cost of capital was assumed to be 11%. The total investment can be depreciated on a straight-line basis over the 10-year period, and profits are taxed at a rate of 50%. Consider the following estimates for the scooter project. Market size Market share Unit price Unit variable cost Fixed cost 1.02 million .1 385,000.0 310,000.0 3.02 billion Assume investment is depreciated over 10 years straight-line and income is taxed at a rate of 50%. a. What is the NPV of this alternative scheme? (Do not round intermediate calculations. Enter your answer in billions. Round your answer to 2 decimal places.) Net Present Value = b. Calculate the break-even point. (Do not round intermediate calculations. Round "PV Factor" to 6 decimal places and the final answer to the nearest whole number.) Break Even Point = d. Consider the following Preliminary cash-flow forecasts for Otobai's electric scooter project (figures in billions). Calculate the variable cost per year at which the electric scooter project would break even. Assume that the initial investment is 15.10 billion. Investment is depreciated over 10 years straightline and income is taxed at a rate of 50%. Use Table 10.1. (Do not round intermediate calculations. Round your answer to 2 decimal places.) 1. 2. 3. 4. 5. Investment Revenue Variable cost Fixed cost Depreciation Year 0 15.1 Years 1-10 39.27 31.00 3.02 1.51 6. Pretax profit 7. Tax 8. Net profit Operating cash flow Net cash flow 3.74 1.87 1.87 3 -15 3 Variable Cost per year = e. Calculate the DOL. Consider fixed cost assuming the additional investment of 15.10 billion. (Do not round intermediate calculations. Round your answer to 2 decimal places.) DOL = A candidate drug requires an $18 million investment for phase II clinical trials. If the trials are successful (44% probability), the company learns the drug's scope of use and updates its forecast of the drug's PV at commercial launch. The investment required for the phase III trials and prelaunch outlays is $130 million. The probability of success in phase III and prelaunch is 80%. Launch comes three years after the start of phase III if the drug is approved by the FDA. The probabilities of the upside, most likely, and downside outcomes are 25%, 50%, and 25%, respectively. If the trials are successful, the manager learns the commercial potential of the drug, which depends on how widely it can be used. Suppose that the forecasted PV at launch depends on the scope of use allowed by the FDA. These are an upside outcome of NPV = $700 million if the drug can be widely used, a most likely case with NPV = $300 million, and a downside case of NPV = $100 million if the drug's scope is greatly restricted. We assume a risk-free rate of 4% and market risk premium of 7%. If FDA-approved pharmaceutical products have asset betas of .8, the opportunity cost of capital is 9.6%. Accordingly, the NPV works out to $19 million. The R&D team has put forward a proposal to invest an extra $20 million in expanded phase II trials. Phase II takes two years. The object is to prove that the drug can be administered by a simple inhaler rather than as a liquid. If successful, the scope of use is broadened and the upside PV increases to $1 billion. The probabilities of success are unchanged. Use figure 10.6. a-1. Calculate the NPV. (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV = a-2. Is the extra $20 million investment worthwhile? Yes No b-1. Assuming that the probability of success in the phase III trials falls to 75%, recalculate the NPV with the extra 20 million investment. (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV = b-2. Is the extra $20 million investment worthwhile? Yes No The following are real options EXCEPT: stock options. timing options. options to expand. options to abandon. Monte Carlo simulation involves the following steps: I) Step 1: Modeling the project; II) Step 2: Specifying probabilities; III) Step 3: Simulating cash flows; IV) Step 4: Calculating present value I and II only I, II, and III only II, III, and IV only I, II, III, and IV A candidate drug requires an $18 million investment for phase II clinical trials. If the trials are successful (44% probability), the company learns the drug's scope of use and updates its forecast of the drug's PV at commercial launch. The investment required for the phase III trials and prelaunch outlays is $130 million. The probability of success in phase III and prelaunch is 80%. Launch comes three years after the start of phase III if the drug is approved by the FDA. The probabilities of the upside, most likely, and downside outcomes are 25%, 50%, and 25%, respectively. If the trials are successful, the manager learns the commercial potential of the drug, which depends on how widely it can be used. Suppose that the forecasted PV at launch depends on the scope of use allowed by the FDA. These are an upside outcome of NPV = $700 million if the drug can be widely used, a most likely case with NPV = $300 million, and a downside case of NPV = $100 million if the drug's scope is greatly restricted. We assume a risk-free rate of 4% and market risk premium of 7%. If FDA-approved pharmaceutical products have asset betas of .8, the opportunity cost of capital is 9.6%. Accordingly, the NPV works out to $19 million. The R&D team has put forward a proposal to invest an extra $20 million in expanded phase II trials. Phase II takes two years. The object is to prove that the drug can be administered by a simple inhaler rather than as a liquid. If successful, the scope of use is broadened and the upside PV increases to $1 billion. The probabilities of success are unchanged. Use figure 10.6. a-1. Calculate the NPV. (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV = a-2. Is the extra $20 million investment worthwhile? Yes No b-1. Assuming that the probability of success in the phase III trials falls to 75%, recalculate the NPV with the extra 20 million investment. (Enter your answer in millions. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV = b-2. Is the extra $20 million investment worthwhile? Yes No You need to choose between making a public offering and arranging a private placement. In each case the issue involves $10.7 million face value of 10-year debt. You have the following data for each: A public issue: The interest rate on the debt would be 8.85%, and the debt would be issued at face value. The underwriting spread would be 1.57%, and other expenses would be $87,000. A private placement: The interest rate on the private placement would be 9.7%, but the total issuing expenses would be only $37,000. a-1. Calculate the net proceeds from public issue. (Enter your answer in nearest dollars not in millions.) Net proceed = a-2. Calculate the net proceeds from private placement. (Enter your answer in nearest dollars not in millions.) Net Proceed = b-1. Calculate the PV of extra interest on private placement. (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.) PV of extra interest = b-2. Other things being equal, which is the better deal? Public issue Private placement n 2010 the Pandora Box Company made a rights issue at 6.7 a share of one new share for every four shares held. Before the issue there were 9.3 million shares outstanding and the share price was 9.4. Suppose that the company had decided to issue new stock at 5.7 rather than 6.7. a. How many new shares would it have needed to sell to raise the same sum of money? (Enter your answer in whole numbers not in millions.) Number of shares = b. What was the value of the right to buy one new share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of the right = c. What was the prospective stock price after the issue? (Round your answer to 2 decimal places.) Prospective stock price = d. How far could the total value of the company fall before shareholders would be unwilling to take up their rights? (Enter your answer in millions rounded to 2 decimal places.) Total value of the company = Select the appropriate terms that is associated with one of the events beneath. a. Investors indicate to the underwriter how many shares they would like to buy in a new issue and these indications are used to help set the price. Best efforts Bookbuilding Shelf registration Rule 144A b. The underwriter accepts responsibility only to try to sell the issue. Best efforts Bookbuilding Shelf registration Rule 144A c. Some issues are not registered but can be traded freely among qualified institutional buyers. Best efforts Bookbuilding Shelf registration Rule 144A d. Several tranches of the same security may be sold under the same registration. (A \"tranche\" is a batch, a fraction of a larger issue.) Best efforts Bookbuilding Shelf registration Rule 144A Indicate whether the following statements are true or false. a. Venture capitalists typically provide first-stage financing sufficient to cover all development expenses. Second-stage financing is provided by stock issued in an IPO. True False b. Underpricing in an IPO is only a problem when the original investors are selling part of their holdings. True False c. Stock price generally falls when the company announces a new issue of shares. This is attributable to the information released by the decision to issue. True False The market for venture capital refers to the: I) private financial marketplace for providing equity investment for small, start-up firms; II) bond market; III) market for providing equity to well-established firms I only II only II and III only III only Arrange the following in chronological order for a typical start-up firm: I) VC financing; II) mezzanine financing; III) stage 1, 2, 3, 4, etc., financing; IV) IPO I, II, III, and IV I, III, II, and IV IV, I, II, and III III, I, II, and IV Generally, venture capital funds are organized as: I) proprietorships; II) corporations; III) limited private partnerships I only II only III only I and II only The main reason for the recent migration of a large number of firms from public-to-private ownership is: blue-sky laws. Sarbanes-Oxley Act. international accounting standards (IAS). advent of shelf registration. Underwriters will handle an issue of new securities on a: I) best efforts basis; II) firm commitment basis; III) all or none basis I only II only III only I or II or III The underwriter's spread is the highest for: IPOs. seasoned equity offerings. convertible bonds. straight bonds