A mutual fund is holding a portfolio consists of four bonds. Duration of Bond A is 1.22-year, of Bond B is 2.75-year, of Bond C is 3.11-year, of Bond D is 5.16. The proportion of Bond A in the portfolio is 30%, Bond B is 25%, Bond C is 15%, and the rest goes to Bond D.

a) Which bond in the portfolio is exposed to the lowest interest rate risk? Briefly explain.

b) What is the duration of the portfolio?

Problem 16-14
Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,700 per month, and the rent is $2,900 per month. In addition, she must make a tax payment of $14,000 in December. The current cash on hand (on December 1) is $550, but Koehl has agreed to maintain an average bank balance of $6,000 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $100,000.

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

   
   
2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
   $

a) In the first trading day of 1998, Hang Seng Index closed at 10680.60, while in the last trading day of 2017, it closed at 29919.15. What is the average annual growth rate of Hang Seng Index in this 20-year?                              

b) The following yield curve is observed of the U.S. Treasury securities on 28th October 2019:

Suppose the pure expectation theory is correct. Forecast the expected one-year yield rate of one year later and of two years later respectively.  

4. Flying High is currently an all-equity firm. It has 1 million shares outstanding and the current share price is $10 per share. The management plans to issue $3 million of perpetual debt and use the proceeds to buy back part of its shares. The debt cost of capital at the new capital structure is 7%. The corporate tax rate is 20%.

Assume the EBIT each year will be high enough so the 30 percent limit on the interest deduction will not be reached. (Therefore the entire interest expense is tax deductible.)

a. Calculate the annual interest tax shield associated with this debt issue.

b. Calculate the present value of the interest tax shields, assuming the interest tax shields have the same risk as the firm's debt.

c. Calculate the value of the firm after the change in capital structure.

d. Calculate the market capitalization after the change in capital structure.

Consider the below alternatives, using a MARR of 10%, and an investment budget of $100,000:

1. Calculate the Internal Rate of Return for each Option

2. Assuming the options A, B, C, and D are mutually exclusive, which option is the best economical choice? You can choose any appropriate method of analysis for comparing alternatives.

3. What is the weighted average Rate of Return for the choice you made assuming that what remains from of the budget is invested at the MARR.

The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.

1. What will be the value of each of these bonds when the going rate of interest is 4%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

   Bond L	$
   Bond S	$

   
   
2. What will be the value of each of these bonds when the going rate of interest is 9%? Assume that there is only one more interest payment to be made on Bond S. Round your answers to the nearest cent.

   Bond L	$
   Bond S	$

Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 35 percent debt. There are currently 10,560 shares outstanding at a price per share of $50. EBIT is expected to remain constant at $60,696. The interest rate on new debt is 5 percent and there are no taxes.

Your father has just retired and does not know what to do with his retirement bonus. One of his friends told him that bonds might be a good option to invest since they are less risky. His friend suggest your father two bonds, however he cannot choose one to invest in. Thus, he asks your opinion.

Bond 1: Issued by U.S. Treasury today. It is a zero coupon Treasury Bill, one year to maturity and 10,000 par value. The yield to maturity on this bill is 7%.

Bond 2: Issued by Galveston Galleries Inc. The 30 year bond was issued ten years ago at a face value of $1,000, paying a coupon rate of 8%. It is paying semi-annual coupon payments. The bonds of companies that were similar to Galveston at the time its bond was issued are now yielding 10%.

a)Calculate the price of Bond 1.
b)CalculatethepriceofBond2.
c) If Bond 1 is selling for $9,000 and Bond 2 is selling for $950 today then decidewhich one your father should choose to invest. Briefly discuss your answer.
d) Assume that one year passed and the yield to maturity for Bond 2 becomes 9%calculate the new price of Bond 2.

e) If your father buys Bond 2 from the price you calculated in part (b) and sells it a year later from the price you calculated in part (d) then calculate the coupon yield and capital gains yield.
f) Assume your father did not sell Bond 2 and hold it one more year so another year passes and the price of Bond 2 becomes $1,101.45. Calculate yield to maturity on this bond. Please make only two iterations. Where you start and in which direction you change the yield to maturity in the second iteration are important for getting full credit on this question.
g) Assume your father bought Bond 2 two years ago and still holds it. Today he reads an article on the newspaper and learns that the credit rating of Galveston Galleries Inc. has decreased from AAA to AA. Briefly discuss how this information will affect the yield to maturity and price of Bond 2.

Explain in a few lines why diversifiable risk cannot be remunerated on markets in equilibrium?

A shareholder requires a rate of return that is twice as high on a share with a β coefficient that is twice as high as an other share. True or false(Explain)

What does a low-risk premium indicates?

Geary Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $585,846 is estimated to result in $250,457 in annual pretax cost savings. The press falls in the MACRS five-year class (Refer to the MACRS table on page 277), and it will have a salvage value at the end of the project of $139,172. The press also requires an initial investment in spare parts inventory of $62,850, along with an additional $11,981 in inventory for each succeeding year of the project. If the shop's tax rate is 0.23 and its discount rate is 0.1, what is the total cash flow in year 4? (Do not round your intermediate calculations.)

(Make sure you enter the number with the appropriate +/- sign)

What is the Net Present Value (NPV) and Internal Rate of Return (IRR) of spending $120,000 today on law school assuming you made $50,000/year before going to law school and $55,000/year for the next 35 years after law school? Assume you could invest this money elsewhere and earn 13%? with financial calculator

answer NPV = ($82,072.14); IRR = 2.26%

Given the two projects with given cash flows, the NPV of project A is how many more (or less) dollars than project B if the discount rate is 9%?

Answer with two decimals.

Project A    Project B

CF0: -13,773    -10,543

CF1: 3,480    1,723

CF2: 4,302    2,290

CF3: 9,768    4,794

CF4: 8,914    7,550

CF5: 2,684 12,530