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situation? a. Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account. b. Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options. c. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget. d. Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget. e. Real options should not have any effect on the size of the optimal capital budget. 11 . Chapter 13: Real Options Conceptual Questions Page 189 Multiple Choice: Problems Medium: (Problems 12 and 13 must be kept together. 12 Use 13 only if 12 is also used.) . (13.3) Decision tree: expected NPV Answer: d MEDIUM Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, and then selling the successful ones to major oil refining companies. TWI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. t = 0. A \$400 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t = 1. If the feasibility study indicates good potential, the firm would spend \$1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. t = 2. If the exploratory wells test positive, TWI would go ahead and spend \$10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. t = 3. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a \$25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then only receiving a \$10,000 inflow. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? a. b. c. d. e. \$336.15 \$373.50 \$415.00 \$461.11 \$507.22 13 . (13.3) Decision tree: SD and CV Answer: c MEDIUM In the previous problem you were asked to find the expected NPV of a project TWI is considering. Use the same data to calculate the project's coefficient of variation. (Hint: Use the expected NPV as found in Problem 12.) a. b. c. d. e. 5.87 6.52 7.25 7.97 8.77 Problems Chapter 13: Real Options Page 190 (Problems 14 and 15 must be kept together. 14 Use 15 only if 14 is also used.) . (13.3) Investment timing option, decision trees Answer: d MEDIUM Nebraska Pharmaceuticals Company (NPC) is considering a project that has an up-front cost at t = 0 of \$1,500. (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be \$500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only \$25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved. NPC is considering whether to make the investment today or to wait a year to find out about the FDA's

Squared dev. times probability \$250,671 \$752,013 \$1,002,685 \$1,001.34 2.81 Squared dev. times probability \$17,789 \$53,366 \$71,154 \$266.75 0.58 2.23 Delay, then invest in period 1 if the outlook is good: Prob. 0.75 0.25 1.00 NPV \$616.03 \$0.00 \$462.02 NPVi E(NPV) \$154 \$462 Squared deviation \$23,718 \$213,463 Variance Standard deviation CV Reduction in the CV due to waiting Note that the problem implicitly assumes that the project is riskless if it is delayed. This is, of course, unrealistic. Note also that a lower cost of capital should be used to find the NPV of the Go Now decision than the Wait decision. The appropriate cost of capital is often lowered by the existence of real options. 16. (13.3) Project NPV--nonalgorithmic Answer: b EASY Find the project's NPV using a financial calculator and entering the following data inputs: CF0 = -3,000,000; CF1-5 = 500,000; I/YR = 10; and then solve for NPV = -\$1,104,607. 17. (13.3) Growth option Answer: c MEDIUM 0 1 r = 10% | | -3,000,000 500,000 NPV = 1,104,607 +1,303,935 \$ 199,328 2 | 500,000 3 | 500,000 4 | 500,000 5 | 500,000 NPV = +6,000,000 (35%) NPV = -6,000,000 (65%) Step 1: Find the NPV at t = 0 of the first project: Enter the following data inputs in the financial calculator: CF0 = -3,000,000; CF1-5 = 500,000; I/YR = 10; and then solve for NPV = -\$1,104,607. Step 2: Find the NPV at t = 0 of the new projects: If at t = 5 the firm's technology is not successful, the firm will choose not to do the additional projects (since their NPV is -\$6,000,000). Therefore, the NPV at t = 5 is calculated as 0.35(\$6,000,000) + 0.65(\$0) = \$2,100,000. However, this is the NPV at t = 5, so we need to discount this NPV to find the NPV of the additional projects today. Enter the following data inputs in the financial calculator: N = 5; I/YR = 10; PMT = 0; FV = 2,100,000; and then solve for PV = \$1,303,935. Step 3: Find the NPV of the entire project considering its future opportunities: -\$1,104,607 + \$1,303,935 = \$199,328. 18. (13.3) Project NPV--nonalgorithmic Answer: a EASY Step 1: Find the project's expected cash flows in Years 1 through 5: (0.5)(\$110,000) + (0.5)(\$25,000) = \$67,500. Step 2: Find the project's NPV by entering the following data inputs in the financial calculator: CF0 = -250,000; CF1-5 = 67,500; I/YR = 12; and then solve for NPV = -\$6,678. 19. (13.3) Abandonment option--nonalgorithmic No abandonment: Yr. 0 1 | 110,000 25,000 2 | 110,000 25,000 3 | 110,000 25,000 4 | 110,000 25,000 5 | 110,000 25,000 Prob 0.5 0.5 NPV \$146,525 159,881 Prob NPV \$73,263 - 79,941 Answer: e MEDIUM 0.5 -250,000 0.5 E(NPV) = \$ -6,678 Abandonment: Yr. 0 1 | 110,000 125,000 2 | 110,000 3 | 110,000 4 | 110,000 5 | 110,000 Prob 0.5 0.5 NPV \$146,525 -138,393 Prob NPV \$73,263 - 69,196 0.5 -250,000 0.5 E(NPV) = \$ 4,067 Value of Abandonment = \$4,067 (-\$6,678) = \$10,745 Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education. Below is a small sample set of documents: INART 115 NY Film >> INART >> 115 (Spring, 2010) INART 115: THE POPULAR ARTS IN AMERICA POPULAR MUSIC The Popular Music Forum: Assignment #1 A Position Paper on The Future of Popular Music. To be followed by a Response Paper NOTE: This assignment is to be a minimum of 500 words in length and due no late... cvpr01_segmentation ull.edu >> MATH >> CS715 (Spring, 2010)

... prelims_Micro Prelim June 2008 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of EconomicsDate: June 23, 2008 Time: 5 hoursMicroeconomicsReading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREE Answer FOUR questions Question 1. A consumer with wealth w buys goods 1 and 2 in... prelims_Micro Prelim Sept 2004 UC Davis >> ECON >> 200D (Winter, 2006) University of California, Davis Department of Economics MicroeconomicsDate: September 2, 2004 Time: 4 hours Reading Time: 20 minutesPRELIMINARY EXAMINATION FOR THE Ph.D. DEGREEPLEASE ANSWER FOUR QUESTIONS (OUT OF FIVE)Question 1. In this question we c... prelims_Micro Prelim Sept 2005 UC Davis >> ECON >> 200D (Winter, 2006)

A's return with the market return = 0.85. = Standard deviations respectively. of returns of A and the market, Cov(rA,rM) = 0.85(0.15)(0.12) = 0.0153. Cov(rB,rM) = B,M B M = 0.67(0.20)(0.12) = -0.01608. Security A's contribution to the portfolio risk is, therefore, higher than that of B. In a single-asset portfolio, the security's risk is measured by the variance of its returns. VarianceA = VarianceB = 2 A = (0.15)2 = 0.0225, and = (0.20)2 = 0.04. 2 B Thus, in a single-asset portfolio, B is riskier than A, but in a diversified (CAPM) portfolio, A is riskier. b. Beta coefficients of A and B are calculated as follows: bA Cov rA , rM 2 M A,M A 2 M M 0.0153 0.12 2 1.0625 . bB Cov rB, rM 2 M 0.01608 0.12 2 1.1167 . c. The value of rM is calculated from the CAPM equation: rsA = rRF + (rM - rRF)bA. Therefore, 1.0625rM = 12.4% 6% + 6.375% = 12.775%. 12.02%. A similar solution could be obtained by applying the CAPM equation to Chapter 5 - Page 16 rM = 12.775%/1.0625 = 12.4% = 6% + (rM 6%)1.0625. Security B. 36. Portfolios and risk Diff: T Expected Portfolio Return, kp rp (%) 13.0 12.0 11.0 10.0 B C A D Efficient Set (BCDE) E Attainable Set 1 2 3 4 5 6 7 Portfolio Risk, p(%) a. rp = x(rX) + (1 x)(rY) x rX + (1 - x) rY = rp ______________________________________________ 1.00 0.75 0.50 0.25 0.00 2 p 10% 10 10 10 10 2 X 0.00 0.25 0.50 0.75 1.00 2 2 Y 12% 12 12 12 12 x cov XY 10.0% 10.5 11.0 11.5 12.0 x2 1 X Y x 2x 1 covXY = rXY = (0.75)(0.05)(0.06) = 0.00225. At 100% Stock X: p 1.00 2 0.05 2 0.0025 0.05. At 75% Stock X: p 0.75 2 0.05 2 0.00141 0.25 2 0.06 2 0.000225 2 0.75 0.25 0.00225 0.002479 0.04979 . 0.000844 At 50% Stock X: p 0.50 2 0.05 0.000625 2 0.50 2 0.06 0.0009 2 2 0.50 0.50 0.00225 0.00265 0.05148 . 0.001125 At 25% Stock X: Chapter 5 - Page 17 p 0.25 2 0.05 2 0.000156 0.75 2 0.06 2 0.002025 2 0.25 0.75 0.00225 0.003025 0.055 . 0.000844 At 0% Stock X: p 1.0 2 0.06 2 0.0036 0.06. b. Portfolio _________ A B C D E Percent in X ____________ 100% 75 50 25 0 Percent in Y ____________ 0% 25 50 75 100 rp ______ 10.0% 10.5 11.0 11.5 12.0 p ______ 5.00% 4.98 5.15 5.50 6.00 The segment BCDE is efficient. The segment BAE is not efficient. c. With the addition of a riskless asset, a new portfolio can be created which combines risk-free and risky assets. Now investors will choose combinations of the market portfolio and the riskless asset. If borrowing is permitted, then less risk-averse investors will move out the CML beyond P. d. rp rRF rM M rRF p 6% XM 12% 6% 10% 4% X 21%. 4% 4% e. b X cov rX , rM 2 M X M 2 M XM M 5% 0.80 4% 1.0. bY 6% 0.9 4% 5.4% 4% 1.35. f. rX = rRF + (rM - rRF)bX = 6% + (11% - 6%)1.0 = 11%. rY = 6% + (11% - 6%)1.35 = 12.75%. ^ ^ 10% < 11%, and rY 12% < Since the expected return on X, rX 12.75%, both stocks are out of equilibrium. They are both overvalued. Their prices would decline, and their expected returns would rise, until an equilibrium was restored. Chapter 5 - Page 18 37. Efficient portfolios kp Diff: T (%) (%) 14 13 12 11 10 9 8 7 6 C B A D E rp p (%) 0 2 4 6 8 10 12 14 16 ABCDE = feasible set. BCDE = efficient set of risky assets. rRFD = efficient set including riskless asset. a. The table below shows the returns and standard deviations for various portfolios of Securities A and B. ======================================================== Percent of Percent of Expected Standard Portfolio in Portfolio in Portfolio Deviation of Security A Security B Return Portfolio (x) (1 - x) rp(%) Return p (%) ________________________________________________________ 100 0 10.0 10.00 75 25 11.0 8.39 50 50 12.0 9.01 25 75 13.0 11.52 0 100 14.0 15.00 ________________________________________________________ Calculations: rp = xrA + (1 - x)rB. Chapter 5 - Page 19 p x2 2 A 1 x 2 2 B 2x 1 x AB B A B . rA = 10%; A = 10%; rB = 14%; For x = 0.5: = 15%; rAB = 0%. rp = 0.5(10%) + 0.5(14%) = 0.05 + 0.07 = 0.12 = 12%. p 0.5 2 10 2 25 56.25 1.5 2 15 2 81.25 2 0.5 0.5 0 10 15 9.01%. rp and for other combinations of p portfolio were similarly calculated. Securities A and B in the b. If the correlation coefficient

were positive, then the CML would have a less steep slope. The riskiness of the portfolio would increase. If the correlation coefficient were negative, then the CML would be steeper. c. This would not represent a stable equilibrium, because no one would want to hold the riskless asset. In a stable equilibrium, all securities must be priced so that they will be held in portfolios. Therefore, the price of the riskless asset will fall, and its rate of return, rRF, will rise. This will produce a new tangency point and cause a new CML to be created. However, at the new tangency point we have a new market portfolio. This will probably lead to a repricing of stocks, hence to a change in the efficient set. The final results will include (1) a higher rRF, (2) a CML that is less steep than the present one, (3) some change in the efficient set, (4) a rebalancing of portfolios, with some investors (those who are most risk averse) holding portfolios that contain some of the riskless asset and some of the market portfolio, and (5) an equilibrium situation in which all securities were held in portfolios and there was no general desire to change portfolio compositions. Chapter 5 - Page 20 Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education. Below is a small sample set of documents: FM11_Ch_06_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 6 BONDS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Discounted cash flows Answer: b Diff: E 1. The market value of any real or financial asset, including stocks, bonds, or art work, may be found by ... FM11_Ch_07_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 7 STOCKS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Total stock returns Answer: b Diff: E 1. The total return on a share of stock refers to the dividend yield less any commissions paid when the sto... FM11_Ch_08_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 8 FINANCIAL OPTIONS AND THEIR VALUATION(Difficulty: E = Easy, M = Medium, T = Tough)True-False Easy:Options 1. Answer: a Diff: EAn option is a contract which gives its holder the right to buy or sell an asset at a predetermined price wi... FM11_Ch_09_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 9 THE COST OF CAPITAL(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Capital Answer: a 1. Capital can be defined as the funds supplied by investors. a. True b. False Component costs of capital Answer: a Diff: E 2. The com... FM11_Ch_10 CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 10 THE BASICS OF CAPITAL BUDGETING: EVALUATING CASH FLOWS(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Capital budget Answer: b Diff: E 1. A firm should never undertake an investment if accepting the project would cause... FM11_Ch_13_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007)

CHAPTER 13 ANALYSIS OF FINANCIAL STATEMENTS(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Ratio analysis 1. Answer: a Diff: ERatio analysis involves a comparison of the relationships between financial statement accounts so as ... FM11_Ch_14_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 14 FINANCIAL PLANNING AND FORECASTING PRO FORMA FINANCIAL STATEMENTS(Difficulty: E = Easy, M = Medium,True-False Easy:Sales forecast 1. Answer: a Diff: EA typical sales forecast, though concerned with future events, will usually be base... FM11_Ch_15_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 15 CORPORATE VALUATION, VALUE-BASED MANAGEMENT, AND CORPORATE GOVERNANCE(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Corporate valuation model 1. Answer: b Diff: EThe corporate valuation model cannot be used for a co... FM11_Ch_16_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 16 CAPITAL STRUCTURE DECISIONS: THE BASICS(Difficulty: E = Easy, M = Medium, T = Tough)True-False Easy:Bankruptcy costs 1. Answer: a Diff: EBecause creditors can foresee, to at least some extent, the costs of bankruptcy, they charge a h... FM11_Ch_17_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 17 CAPITAL STRUCTURE DECISIONS: EXTENSIONS(Difficulty: E = Easy, M = Medium, T = Tough)True-False Easy:Taxes and capital structure 1. Answer: a Diff: EIn a world with no taxes, MM show that the capital structure of a firm does not affec... FM11_Ch_18 CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 18 DISTRIBUTIONS TO SHARHOLDERS: DIVIDENDS AND REPURCHASES(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:Optimal distribution policy 1. Answer: a Diff: EThe optimal distribution policy for a firm strikes a balance betw... FM11_Ch_19 CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 19 INITIAL PUBLIC OFFERINGS, INVESTMENT BANKING, AND FINANCIAL RESTRUCTURING(Difficulty: E = Easy, M = Medium, and T = Tough)TrueFalse Medium:Going public 1. Answer: b Diff: MGoing public establishes a true market value for the firm an... FM11_Ch_20_Test_Bank CSU Fullerton >> FIN >> 332 (Fall, 2007) CHAPTER 20 LEASE FINANCING(Difficulty: E = Easy, M = Medium, and T = Tough)TrueFalse Easy:Types of leases 1. Answer: a Diff: EMany leases written today combine the features of operating and financial leases. Such leases could be called "combin... Paper 2 RIT >> CLA >> 0508.211.0 (Winter, 2008) Erica Grimaldi Science Technology & Values 0508-211-03References Nye, D. E. (2006). Technology Matters: Questions to Live With. Cambridge, Massachusetts: MIT Press.Erica Grimaldi Science Technology & Values 0508-211-03Life would be a lot harder...

Paper 1 RIT >> CLA >> 0508.211.0 (Winter, 2008) Erica Grimaldi Science Technology & Values 0508 21103 Paper 1: The Social Aspects of Modern Science Social aspects are very important to modern science, but are not as important as scientific skill. Some social aspects of modern science inc... Paper 3 RIT >> CLA >> 0508.211.0 (Winter, 2008) Erica Grimaldi Science Tech Values 0508-211-03 References Castel, B., & Sismondo, S. (2003). The Art of Science. Peterborough, Ontario, Canada: Broadview Press Ltd. Nye, D. E. (2006). Technology Matters: Questions to Live With. Cambridge, Massachuset... DiscussionPaper1 RIT >> CLA >> 0508.211.0 (Winter, 2008) Erica Grimaldi Science Technology & Values 050821103 761210 Authority and Science Science has acquired authority by accident. The public has given science authority, and science has accepted it. Unknowingly, with authority comes some dange... DiscussionPaper2 RIT >> CLA >> 0508.211.0 (Winter, 2008) Erica Grimaldi Science Technology & Values 050821103 Discussion Paper Authority is the power to influence thought, opinion, or behavior. Examples of authority in our society can commonly be found throughout Government, Schools/Teachers, ... DIscussionNotes2 RIT >> CLA >> 0508.211.0 (Winter, 2008) Authority Bader Dip Erica Grimaldi Matthew Cipolla Science Tech and Values RIT Date: 12/17/2007What is Authority ? Power to influence or command thought, opinion, or behavior The power to make someone doing something against the will of their consc... DiscussionNotes1 RIT >> CLA >> 0508.211.0 (Winter, 2008) Authority and Science. How has science aquired authority? by accident? Is there any danger associated with authority?What does Milgram think of Authority. Milgram quotes the words of the social philosopher Harold J. Laski: "Our business, if we desi... ImagingNMpaper2 RIT >> CIAS >> 2083.206.0 (Winter, 2008) original full sized piece Erica Grimaldi A MomentPhil Hansen2007detailed close-upsOriginal Web Location: http:/philinthecircle.com/amoment.htmlstep-by-step processfinal pieceInfluencesPhil Hansen2007Original Web Loc... ImagingPaper1_pg2 RIT >> CIAS >> 2083.206.0 (Winter, 2008) Erica Grimaldi Imaging For New Media January 24, 2008 Above: Photographer: Eric Baden Title of Piece: Angel Southern Live Oak Tree Below: Photographer: Eli Reed Title of Piece: Live Oak Tree Alle ... ClassNotes4 RIT >> CIAS >> 2083.206.0 (Winter, 2008) Examples: http:/www.maggietaylor.com/indexframe.html http:/www.pattirussotti.com/ EPSON scan settings: mode: pro document type: reflective image type: 24-bit color resolution: 300 or larger Unsharp Mask Filter: off Descreening Filter: on Color Restor... ImagingPaper1_pg1