You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars The board of directors have decided that there is a need to divert investments towards LED based lighting solutions instead of traditional light bulbs You are currently evaluating two alternative projects The first is to integrate new technology in the existing factory, where the cash flows for the first 4 years will be below average as the production will be affected due to refitting of facilities However, from year 5, it will increase to above average levels once full capacity is achieved The second project is to take over an existing small business with the required production facility This is expected to increase cash flows to above average levels immediately for the next 4 years, but decrease to lower average cash flows from year 5, when the factory's technology becomes outdated How do you choose from the two available options Given the strategy of the firm, what other factors need to be taken into consideration for this decision How do you choose from the two available options (Select the best answer below ) A The firm cannot earn a return on funds it receives therefore, the receipt of funds, whether sooner or later, will not affect the choice B The firm can earn a return on funds it receives therefore, the receipt of funds is preferred sooner rather than later The second project will generate an above average return in the first 4 years, while the first project will generate below average returns in the same period C The firm can earn a return on funds it receives therefore, the receipt of funds is preferred later rather than sooner The second project will generate a below average return from year 5, while the first project will generate above average returns in the same period D The firm can earn a return on funds it receives therefore, the project that earns the larger overall earnings is the best choice 2 Bond types and characteristic Several years ago you purchased a callable corporate bond at its $1,000 par value The bond's call price is $1,050 Since you purchased the bond, interest rates have fallen a little, and the bond's market price is $1,030 If the bond is called from you today, what is the call premium

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 20, 2024

You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there

You are the chief financial officer (CFO) of Morb lights, a manufacturer of lighting components for cars. The board of directors have decided that there is a need to divert investments towards LED-based lighting solutions instead of traditional light bulbs. You are currently evaluating two alternative projects. The first is to integrate new technology in the existing factory, where the cash flows for the first 4 years will be below average as the production will be affected due to refitting of facilities. However, from year 5, it will increase to above-average levels once full capacity is achieved. The second project is to take over an existing small business with the required production facility. This is expected to increase cash flows to above-average levels immediately for the next 4 years, but decrease to lower-average cash flows from year 5, when the factory's technology becomes outdated.

How do you choose from the two available options? Given the strategy of the firm, what other factors need to be taken into consideration for this decision?

How do you choose from the two available options?(Select the best answer below.)

The firm cannot earn a return on funds it receives; therefore, the receipt of funds, whether sooner or later, will not affect the choice.

The firm can earn a return on funds it receives; therefore, the receipt of funds is preferred sooner rather than later. The second project will generate an above-average return in the first 4 years, while the first project will generate below-average returns in the same period.

The firm can earn a return on funds it receives; therefore, the receipt of funds is preferred later rather than sooner. The second project will generate a below-average return from year 5, while the first project will generate above-average returns in the same period.

The firm can earn a return on funds it receives; therefore, the project that earns the larger overall earnings is the best choice.

2. Bond types and characteristic Several years ago you purchased a callable corporate bond at its $1,000 par value. The bond's call price is $1,050. Since you purchased the bond, interest rates have fallen a little, and the bond's market price is $1,030.

If the bond is called from you today, what is the call premium?