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81.
You are considering a project that has been assigned a discount rate of 14
percent. If you start the project today, you will incur an initial cost of $8,500
and will receive cash inflows of $5,550 a year for two years. If you wait one
year to start the project, the initial cost will rise to $9,200 and the cash
flows will increase to $5,800 a year for two years. What is the value of the
option to wait?
82.
Southern Shores is considering a project that has an initial cost today of
$13,000. The project has a two-year life with cash inflows of $7,500 a year.
Should the firm opt to wait one year to commence this project, the initial
cost will increase by 5 percent and the cash inflows will increase to $8,500
a year. What is the value of the option to wait if the applicable discount rate
is 12 percent?
Topic: Option to wait
83.
Western Industrial Products is considering a project with a four-year life
and an initial cost of $212,000. The discount rate for the project is 16
percent. The firm expects to sell 9,600 units on the last day of each year.
The cash flow per unit is $50. The firm will have the option to abandon this
project at the end of year one (after year one's sales) at which time the
project's assets could be sold for an estimated $125,000. The firm should
abandon the project at the end of year one if the expected level of annual
sales, starting with year 2, falls to _____ units or less. Ignore taxes.
84.
Dressler Technologies is considering a project with a 3-year life and an
initial cost of $87,000. The discount rate for the project is 14.5 percent. The
firm expects to sell 1,300 units on the last day of each year. The cash flow
per unit is $32. The firm will have the option to abandon this project at the
end two years (after year 2 sales) at which time the project's assets could
be sold for an estimated $30,000. The firm's managers are interested in
knowing how the project will perform if the sales forecast for year 3 of the
project is revised such that there is a 50/50 chance that the sales will be
either 1,000 or 1,400 units a year. What is the net present value of this
project at time zero given the current sales forecasts?
85.
Patience is reviewing a project with projected sales of 4,200 units a year, a
cash flow of $28 a unit, and a four-year project life. Assume all operating
cash flows occur on the last day of each year. The initial cost of the project
is $247,000. The relevant discount rate is 13 percent. Patience has the
option to abandon the project after two years at which time she feels she
could sell the project's assets for $110,000. At what level of annual sales,
starting in year 3, should she be willing to abandon this project?
86.
You own a convertible bond with a face value of $1,000 and a market value
of $1,034. The bond can be converted into 16 shares of stock. What is the
conversion price?
87.
You own nine convertible bonds. These bonds have a 7 percent coupon, a
$1,000 face value, and mature in 6 years. The bonds are convertible into
shares of common stock at a conversion price of $25. How many shares of
stock will you receive if you convert all of your bonds?
88.
A convertible bond has a face value of $5,000 and a conversion price of $80.
The bond has a 6 percent coupon, pays interest semi-annually, and matures
in 12 years. Similar bonds are yielding 7.5 percent. The current price of the
stock is $42 per share. What is the conversion value of this bond?
89.
A convertible bond has a face value of $1,000 and a conversion price of
$12.50. The bond has a 6 percent coupon, pays interest semi-annually, and
matures in 12 years. Similar bonds are yielding 9 percent. The current price
of the stock is $13.40 per share. What is the straight bond value?
90.
Kurt owns a convertible bond that matures in three years. The bond has an
8 percent coupon and pays interest semi-annually. The face value of the
bond is $1,000 and the conversion price is $25. Similar bonds have a market
return of 9.25 percent. The current price of the stock is $26.50 per share.
What is the straight bond value?
91.
Lucinda owns a convertible bond that matures in six years. The bond has a
9 percent coupon and pays interest annually. The face value of the bond is
$1,000 and the conversion price is $22. Similar bonds have a market return
of 8.75 percent. The current price of the stock is $21.60 per share. What is
the conversion value of this bond?
92.
T-bills currently yield 6.3 percent. Stock in Pinta Manufacturing is currently
selling for $46 per share. There is no possibility that the stock will be worth
less than $39 per share in one year. What is the value of a call option on
this stock if the exercise price is $24 per share?
93.
The price of Time Squared Corp. stock will be either $80 or $95 at the end
of the year. Call options are available with one year to expiration. T-bills
currently yield 6 percent and the current price of Time Squared Corp. stock
is $85. What is the value of a call option if the exercise price is $75 per
share?
94.
The price of Dimension, Inc. stock will be either $65 or $87 at the end of the
year. Call options are available with one year to expiration. T-bills currently
yield 5 percent. Suppose the current price of Dimension stock is $70. What
is the value of the call option if the exercise price is $70 per share?
