Extra problems for 2

# Extra problems for 2 - Extra Practice Problems for Test 2 1...

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1. The McGregor Whisky Company is proposing to market diet scotch. The product will first be test-marketed for three years in southern California at an initial cost of \$540,000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 70% chance that demand will be satisfactory. In this case the company will spend \$4 million to launch the scotch nationwide and will receive an expected annual profit of \$650,000 in perpetuity. If demand is not satisfactory, diet scotch will be withdrawn. Once consumer preferences are known, the product will be subject to an average risk, and therefore, McGregor requires a return of 11% on its investment. However, the initial test-market phase is viewed as much riskier, and McGregor demands a return of 35% on this initial expenditure. What is the NPV of the diet scotch project? T=0 T=1 T=2 T=3 T=4 T=5 T>5 -540,000 0 0 with probability 0.7 -4mil 650,000 650,000 650,000 with probability 0.3 0 0 0 0 A) \$1,141,192 B) \$855,911 C) \$796,364 D) \$235,934 E) \$3,154 2. Announcement of a larger than expected dividend is believed to be “good news” for the company and after such information becomes available investors expect the price of the stock to increase. a) To which form of the efficient market hypothesis does this belief relate? b) How could you test whether the markets are efficient with respect to this information?

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## This note was uploaded on 02/27/2008 for the course FNCE 3010 taught by Professor Donchez,ro during the Spring '07 term at Colorado.

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Extra problems for 2 - Extra Practice Problems for Test 2 1...

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