The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different towns. The end-of-period value of each firm is determined by the weather, as shown below. There will be no synergy to the merger. State Probability Value Rainy .3 $ 310,000 Warm .2 490,000 Hot .5 965,000 The weather conditions in each town are independent of those in the other. Furthermore, each company has an outstanding debt claim of $490,000. Assume that no premiums are paid in the merger. a. What are the possible values of the combined company? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Possible states Joint Value Rain-Rain Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot b. What are the possible values of end-of-period debt and stock after the merger? (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) Rain-Rain Debt Value Stock Value Rain-Warm Rain-Hot Warm-Warm Warm-Hot Hot-Hot
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Case 2 John Thompson is a manager of a candy manufacturing company, Sweet Treats. Sweet Treats believes the demand for their chocolate bars may increase in the coming years and is considering building a new manufacturing plant to increase supply. The decision is up to John whether to build a large plant or a small plant. The profitability of either decision will depend on the state of the market in the future (i.e., the future demand for chocolate bars). For example, in a favorable market, a large plant would result in higher profits but would result in greater losses in an unfavorable market. Additionally, if he anticipates that neither size plant will be economically viable, he can choose to do nothing. To facilitate his decision-making process, he has constructed the following table: Favorable market Unfavorable Market EMV Probability 0.5 0.5 Large Plant $200,000 -$180,000 Small Plant $100,000 -$20,000 Do Nothing $0 $0 John also has the option of hiring a marketing research company to gain more insight into the demand for chocolate bars in the future. It would cost $10,000 to hire this company. With the additional information gained from hiring this firm, John could make a more informed decision regarding whether to build a large plant, small plant, or not build anything. John has obtained the following information: - There is a 0.45 probability that the survey results will be positive - There is a 0.78 probability that the market for chocolate bars will be favorable given the results from the survey are positive - There is a 0.27 probability that the market for chocolate bars will be favorable given the results from the survey are negative Draw the decision tree for the different alternatives faced by John Thompson and use it to answer questions of this case. A. What are the prior probabilities for this problem? (please round to 2 decimal places) b. What is the probability that the marketing survey is positive? (please round to 2 decimal places) c. What are the revised probabilities of this problem? (please round to 2 decimal places) d. What is the probability that the marketing survey is negative? (please round to 2 decimal places) e. What is the EMV when the survey yields favorable (positive) results? f. What is the EMV when the survey yields unfavorable (negative) results? g. What is the EMV of conducting the survey? h. What is the EMV for the best decision if a market survey is not conducted? i. What is the EMV for John’s overall decision strategy? j. Based on the EMV values calculated, John Thompson should not conduct the survey (T/F)? k. Calculate the expected value of perfect information - EVPI. L. What is the maximum amount John should be willing to pay a research firm to conduct a market survey? m. What is the efficiency of sample information?
Jay P.
(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $5.7 million. You also estimate that there is a 50 percent chance that this new restaurant will be well received and will produce annual cash flows of $800,000 per year forever (a perpetuity), while there is a 50 percent chance of it producing a cash flow of only $180,000 per year forever (a perpetuity) if it isn't received well. a. What is the NPV of the restaurant if the required rate of return you use to discount the project cash flows is 12 percent? b. What are the real options that this analysis may be ignoring? c. Explain why the project may be worthwhile even though you have just estimated that its NPV is negative. a. Assume the required rate of return you use to discount the project cash flows is 12%. What is the NPV of the restaurant if things go well? $ (Round to the nearest dollar.) What is the NPV of the restaurant if things go poorly? $ (Round to the nearest dollar.) If there is a 50% chance that this new restaurant will be well received and a 50% chance it will not be received well, what is the expected NPV of the restaurant? $ (Round to the nearest dollar.) b. The real options that this analysis may be ignoring include that Tex-Mex-Thai has the (1) the project if the new restaurant is received well and the (2) the project if it is received poorly. (Select from the drop-down menus.) c. "Although the expected NPV is negative, if the firm has the ability to expand on this project if it is received well, then it should be taken on. Since the firm has the option to abandon the restaurant if it is not received well and to expand the restaurant chain if it is received well, these options may cause the project to have positive expected NPV." Is the statement above true or false? (3) (Select from the drop-down menu.)
Sri K.
Schneider's sweet shop specializes in homemade candies and ice cream. Schneider produces its ice cream in-house, in batches of 50 pounds. The first stage in ice cream making is blending of the ingredients to obtain a mix which meets pre-specified requirements on the percentages of certain constituents of the mix. The desired composition is as follows: 1. Fat: 16% 2. Serum Solids: 8% 3. Sugar Solids: 16% 4. Egg Solids: 0.35% 5. Stabilizer: 0.25% 6. Emulsifier: 0.15% 7. Water: 59.25% The mix can be composed from the following list: Ingredient Cost ($/lb) 1. 40% Cream: 1.19 2. 23% Cream: 0.70 3. Butter: 2.32 4. Plastic Cream: 2.30 5. Butter Oil: 2.87 6. 4% milk: 0.25 7. Skim condensed milk: 0.35 8. Skim milk powder: 0.65 9. Liquid Sugar: 0.25 10. Sugared frozen fresh egg yolk: 1.75 11. Powdered egg yolk: 4.45 12. Stabilizer: 2.45 13. Emulsifier: 1.68 14. Water: 0.00 The number of pounds of a constituent found in a pound of an ingredient is shown below. Note that a pound of stabilizer contributes only to the stabilizer requirement (one pound), and that water contributes only to the water requirement (one pound). Constituent Ingredient 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 0.4 0.2 0.8 0.8 0.9 0.1 0.5 0.6 2 0.1 0.1 0.3 0.1 3 0.7 0.1 4 0.4 0.4 5 1 6 1 7 0.5 0.8 0.2 0.1 0.1 0.8 0.7 0.3 1 Young Jack Schneider has recently acquired the shop from his father. Jack's father has in the past used the following mixture: 9.73 pounds of plastic cream, 3.03 pounds of skim milk powder, 11.37 pounds of liquid sugar, 0.44 pounds of sugared frozen fresh egg yolk, 0.12 pounds of stabilizer, 0.07 pounds of emulsifier, and 25.24 pounds of water. (The scale at Schneider's is only accurate to 100th of a pound). Jack feels that perhaps it is possible to produce the ice cream in a more cost-effective manner. He would like to find the cheapest mix for producing a batch of ice cream, which meets the requirements specified above. Jack is also curious about the cost effect of being a little more flexible in the requirements listed above. He wants to know the cheapest mix if the composition meets the following tolerances: 1) Fat: 15-17% 2) Serum Solids: 7-9% 3) Sugar Solids: 15.5-16.5% 4) Egg Solids: 0.3-0.4% 5) Stabilizer: 0.2-0.3% 6) Emulsifier: 0.1-0.2% 7) Water: 58-59.5% Managerial Report Write a managerial report which compares the cost of Papa Jack's approach to (a) cost-minimized approach using the desired composition (b) the cost-minimized approach with the more flexible requirements. Include in your report the following: 1) The cost of 50 pounds of ice cream under each of the three approaches 2) The amount of each ingredient used in the mix for each of the three approaches 3) A recommendation as to which approach should be used
Adi S.
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