Ask Question, Ask an Expert


Ask Financial Accounting Expert

PART A: (10 marks)

You have been asked to examine Grand Plomp Ltd, a maker of rocket widgets employed by NASA. The owners are wondering whether the return received is adequate to justify the risks taken in each division. You are to consider both divisional risk and return in your analysis and the given information has been collected from the past 15 years to use in your analysis.

424_divisional rank and return.jpg             
• Average annual market return: 12 per cent
• Average annual risk-free rate: 8 per cent

By using standard deviation and beta measures of risk, you are to rank projects in terms of their risk-adjusted return. Such divisions providing the lowest risk per unit of return would be preferred. The analysis can be conducted by using a 'total' definition of risk, or standard deviation, and an ’undiversifiable’ definition or risk or beta.

Given the beta, it is possible to evaluate the required rate of return. Moreover, given the proportion of each division in Global Gears, it is possible to compute the firm beta, return and risk-adjusted return. With this information, it is possible to find out whether Global Gears, as a whole, provides an adequate return to justify the risks taken by its investors.

You are required to:

• Place the relevant information.
• Choose the proper tool or equation.
• Organize and manipulate the data.
• Elucidate the solution.

PART B: (12.5 marks)

Misty Ltd wishes to find out its weighted marginal cost of capital. In preparing for this task, it has compiled the following data:

611_weighted marginal cost.jpg

a) Determine the breaking points and ranges of total financing associated with each source of capital;

b) By using the data developed determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change;

c) Compute the weighted average cost of capital and the weighted marginal cost (WMCC) for each range of total financing

d) By using the results all along with the information on the available investment opportunities shown below, compile the firm's investment opportunities schedule (IOS), plot this schedule and plot the weighted marginal cost of the capital schedule:

305_imvestment opputunity schedules.jpg

Investment Opportunities Schedule
e) Which, if any of the available investments would you suggest that the firm accept? Describe your answer.

PART C: (7.5 marks)

Traditional project evaluation or capital budgeting analysis assumes a firm’s only choice is accept or refuse a program. In a real business situation, firms face many choices with respect to how to operate a project, both before it starts and after it is underway. Any time a firm has the capability to make choices, there is value added to the project in problem – Traditional NPV analysis ignores this value. The study of real options tries to put a dollar value on the capability to make choices.

a) What are real options and how they are valued.
b) Discuss the given:

Locate the given article: IRREVERSIBILITY, UNCERTAINTY, AND INVESTMENT (Robert S Pindyck – Massachusetts Institute of Technology March – 1990 – old but gold)

Most of the major investment expenditures have two significant characteristics which together can dramatically affect the decision to invest. First, the expenditures are largely irreversible; the firm can’t disinvest, thus the expenditures must be viewed as sunk costs. Second, the investments can be delayed, giving the firm an opportunity to wait for new information regarding prices, costs and other market conditions before it commits resources.

c) Compute the given:

Pindyck supplies a simple two-period ex to exemplify how irreversibility can affect an investment decision and how option pricing methods can be used to value a firm’s investment opportunity, and determine whether or not the firm should invest.

Using the given ex replicate Pyndick’s two-period ex.

Consider a firm's decision to irreversibly invest in a widget factory. The factory can be built instantly, at a cost of $7m, and will generate 1000 widgets per year forever, with zero operating cost. Currently the price of widgets is $700, but next year the price will change. With probability .6it will rise to $800, and with probability (l-q) it will fall to $600. The price will then remain at this new level forever. Assume that this risk is fully diversifiable, so that the firm can discount future cash flows using the risk-free rate, which we will take to be 10 percent.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M918

Have any Question? 

Related Questions in Financial Accounting

Assignmentthe current assets and current liabilities

Assignment The current assets and current liabilities sections of the balance sheet of Allessandro Scarlatti Company appear as follows. ALLESSANDRO SCARLATTI COMPANY BALANCE SHEET (PARTIAL) DECEMBER 31, 2014 Cash $ 48,75 ...

Exercise 1 fixed versus variable cost behaviornasenko

Exercise 1: Fixed versus variable cost behavior Nasenko Company's cost and production data for two recent months included the following:                            March    April Production (units)   200       400 Rent   ...

There are four main methods for documenting specific

There are four main methods for documenting specific business processes, systems, and so on. If your company asked you to document the workflow in your department, where would you start and why? How would that change if ...

Assignmentfor all questions assume no other transactions or

Assignment For all questions, assume no other transactions or activities have taken place during the period except as noted. Answer all questions! Prepare and present calculations for partial credits for questions with c ...

What projects can restore the rights and dignity of people

What Projects can restore the rights and dignity of people and societies who may be, or are forced into motion due to social injustices, politics, economic pressures, climate change and war.

Assignmentfinancial statement analysisprepare an eight- to

Assignment Financial Statement Analysis Prepare an eight- to ten-page fundamental financial analysis (excluding appendices, title page, abstract, and references page) that will cover each of the following broad areas bas ...

Yoursquore leading a project to migrate customer data

You’re leading a project to migrate customer data (biographical, billing, and orders) from the legacy system to an off-the-shelf product sold by MicroTech. The project was going well, but a key programmer recently inform ...

The marketing concept holds that a customers who are coaxed

The marketing concept holds that ________. a. customers who are coaxed into buying a product will most likely buy it again b. a new product will not be successful unless it is priced, distributed, and sold properly c. co ...

Assignmentpart 11crimpson company had the following petty

Assignment Part 1 1. Crimpson Company had the following petty cash transaction during January 2016: Jan. 1 Established a petty cash fund of $200 12 Reimbursed the fund for the following expenses: Supplies expense $65.00 ...

Question 1a t shirt company is planning a production run

Question 1: A t shirt company is planning a production run for an event where the attendance (and thus demand for t-shirts) is uncertain. The event planners have indicated that they think the attendance will be 500, 750 ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen