scenario, that is, assuming all variables take on the best possible value? about the scenario? Most Likely Best Case Worst Case Price $50 $55 $45 Variable cost $30 $27 $33 Fixed cost $300,000 $270,000 $330,000 30,000 units 33,000 27,000 units Cash flow = [(1 T) (revenue cash expenses)] + (T depreciation) – – Depreciation expense = $1 million/10 years = $100,000 per year Best-case CF = 0.65 [33,000 ($55 $27) $270,000] + (0.35 $100,000) = $460,100 – – Worst-case CF = 0.65 [27,000 ($45 $33) $330,000] + (0.35 $100,000) = $31,100 – – 12%, 10-year annuity factor = Best-case NPV = (5.65022 $460,100) $1,000,000 = $1,599,666 – Worst-case NPV = (5.65022 $31,100) $1,000,000 = – –$824,278 CH 7 Introducton to Risk and Return Q5 Diversification In of the following situations would you get the largest reduction in risk by spreading your investment across two stocks? two shares are perfectly correlated. is no correlation. is modest negative correlation. is perfect negative correlation.
scenario, that is, assuming all variables take on the best possible value? about the scenario? Most Likely Best Case Worst Case Price $50 $55 $45 Variable cost $30 $27 $33 Fixed cost $300,000 $270,000 $330,000 30,000 units 33,000 27,000 units Cash flow = [(1 – T) (revenue – cash expenses)] + (T depreciation) Depreciation expense = $1 million/10 years = $100,000 per year Best-case CF = 0.65 [33,000 ($55 – $27) – $270,000] + (0.35 $100,000) = $460,100 Worst-case CF = 0.65 [27,000 ($45 – $33) – $330,000] + (0.35 $100,000) = $31,100 12%, 10-year annuity factor = Best-case NPV = (5.65022 $460,100) – $1,000,000 = $1,599,666 Worst-case NPV = (5.65022 $31,100) – $1,000,000 = –$824,278 CH 7 Introducton to Risk and Return Q5 Diversification In of the following situations would you get the largest reduction in risk by spreading your investment across two stocks? two shares are perfectly correlated. is no correlation. is modest negative correlation. is perfect negative correlation.
Sample%20Problems%20-%20Principles%20of%20Corporate%20Finance%20Dec%202015.docx