Give an example of why under purchasing power parity a change in nominal exchange rate does not affect a firm or country.

For the above stocks

1.

a. Calculate the price-weighted average of the four stocks.

b. What is the divisor to produce the base figure market value-weighted index?

2.

Suppose the price for LMN and ABC stay the same, XYZ’s price increases to $110, and PDQ’s

falls to $2

a. Calculate the price-weighted average of the four stocks.

b. Calculate the market value-weighted index of the four stocks.

c. Find the percentage change in the price-weighted average.

d. Find the percentage change in the market value-weighted index.

e.

After

the above change, suppose XYZ has a 4-for-1 stock split, calculate the new divisor

for the price-weighted average of the four stocks.

f. Does the market value-weighted index need to be adjusted for the stock split? Why or Why

not?

1. As the CFO, you decided to hedge using forward contracts. Assume that the expected final sales volume is 30,000. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)

a) if the exchange rate remains at $1.18/€?

b) if the exchange rate will be $1.3/€?

c) if the exchange rate will be $1.1/€?

d) As the CFO, you decided to hedge using option contracts. Assuming expected final sales volume is 30,000, what are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)

e) if the exchange rate remains at $1.18/€?

f) if the exchange rate will be $1.3/€?

g) if the exchange rate will be $1.1/€?

What is the most profitable strategy for the case in which the expected final sales volume is 30,000 (no hedge, forward contract, or option contract)

h) if the exchange rate remains at $1.18/€?

i) if the exchange rate will be $1.3/€?

j) if the exchange rate will be $1.1/€?

k) Is there a best strategy? Why? Note that you only need to provide a few sentences about which strategy to use from no hedge, forward contract, or option contract strategies.

What happens to ROA / ROE / ROIC if the company needs additional funding, which it raises through additional equity ?

1. Oaktree Company has a $1000 face value, 9% coupon bond making annual coupon payments with 10 years to maturity.  What is the dollar amount of the annual coupon payment?

1. You are considering investing in a $1000 face value 10% semi-annual coupon bond with 8 years left to maturity. Similar bonds are yielding 9.5% in the market, so the current price of this bond is _______, and if market interest rates increase to 11% the selling price of the bond would _____________?

   		$957.69; increase to $1,017.50
   		$957.69; decrease to $860.50
   		$1,027.59; decrease to $947.69
   		$1,027.59; increase to $1,107.69

1. You are considering investing in a $1000 face value 12% semi-annual coupon bond with 4 years left to maturity. Similar bonds are yielding 11% in the market, so the current price of this bond is _______, and if market interest rates drop to 10% the selling price of the bond would _____________?

   		$880.50; increase to $924.50
   		$936.67; decrease to $915.50
   		$1,031.67; decrease to $1,016.50
   		$1,031.67; increase to $1,064.63

You are considering investing in a $1000 face value 9% semi-annual coupon bond with 10 years left to maturity. Similar bonds are yielding 10% in the market, so the current price of this bond is _______, and if market interest rates increase to 11% the selling price of the bond would _____________?

1. 		$937.69; increase to $974.50
   		$937.69; decrease to $880.50
   		$1,062.50; increase to $1,087.69
   		$1,062.50; decrease to $1,023.50

1. You are considering investing in a $1000 face value 8% semi-annual coupon bond with 3 years left to maturity. Similar bonds are yielding 9.5% in the market, so the current price of this bond is _______, and if market interest rates drop to 8.25% the selling price of the bond would _____________?

   		$947.73; increase to $974.67
   		$947.73; decrease to $924.67
   		$961.63; increase to $993.47
   		$961.63; decrease to $933.47

1. JAM Co just paid a dividend of $5.00, and expects an annual dividend growth rate of 5% indefinitely.  What is the expected dividend a year from now?

1. XYZ Co just paid a dividend of $3.00, and expects an annual dividend growth rate of 5% indefinitely.  What is the expected dividend a year from now?

1. PDQ Co just paid a dividend of $2.00, and expects an annual dividend growth rate of 6% indefinitely.  What is the expected dividend a year from now?

1. RAM Co just paid a dividend of $3.00, and expects an annual dividend growth rate of 3% indefinitely.  What is the expected dividend a year from now?

1. PDQ Co has a dividend payout ratio of 30% (which means it has a retention ratio of 70%) If Return on Earnings is 5%, what is the expected growth rate for dividends?

The Cookie Shop's purchases are equal to 63 percent of the following month's sales. The accounts payable period for purchases is 30 days while all other expenditures are paid in the month they are incurred. Assume each month has 30 days. The company has compiled the following information. April May June Sales $ 7,100 $ 7,400 $ 7,800 Other expenses 1,625 1,675 1,925 Interest and taxes 380 390 410 What are the company's total cash disbursements for May?

If you buy a computer directly from the manufacturer for $ 3,310 and agree to repay it in 60 equal installments at 1.79%interest per month on the unpaid​ balance, how much are your monthly​ payments? How much total interest will be​ paid?

You would like to buy a house that costs

$ 350 comma 000$350,000.

You have

$ 50 comma 000$50,000

in cash that you can put down on the​ house, but you need to borrow the rest of the purchase price. The bank is offering you a​ 30-year mortgage that requires annual payments and has an interest rate of

9 %9%

per year. You can afford to pay only

$ 27 comma 740$27,740

per year. The bank agrees to allow you to pay this amount each​ year, yet still borrow

$ 300 comma 000$300,000.

At the end of the mortgage​ (in 30​ years), you must make a balloon​ payment; that​ is, you must repay the remaining balance on the mortgage. How much will be this balloon​ payment?

A company is considering purchasing some new machinery. Collectively, the acquisition cost would be $3.72 million plus a transportation charge of $94,0000 to get the machinery to the plant. To better engineer the production flow, $450,000 was spent to pay a production consultant. Special electrical service would be required, that and related (required) plant upgrades will be $124,000. Training of the production workers costing $34,000 is also necessary. An increase in inventory of $75,000 is needed, to supply these raw materials our vendor is requiring that we reduce our account payables by $22,000. The now superior widgets that we will be manufacturing will be able to command a premium of $1,470,000 per year but manufacturing costs will increase by $270,000. The machinery has an economic life of 4 years and will be depreciated to zero using the straight line depreciation method. The machinery is expected to be sold at the end for $180,000. The company is taxed at 32% and can raise capital at a cost of 8%.

(a) What is the project’s initial cash outflow?

(b) What is the project’s operating cash flow per year?

(c) What is the project’s terminating cash flow?

BUSI 320 Comprehensive Problem 3 FALL 2019

Use what you have learned about the time value of money to analyze each of the following decisions:

Decision #1:   Which set of Cash Flows is worth more now?

Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:

Option A: Receive a one-time gift of $ 10,000 today.   

Option B: Receive a $1500 gift each year for the next 10 years. The first $1400 would be

     received 1 year from today.                     

Option C: Receive a one-time gift of $18,000 10 years from today.

Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years.    Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

       Option B would be worth $__________ today.

       Option C would be worth $__________ today.

       Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect the interest rate to be 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

       Option B would be worth $__________ today.

       Option C would be worth $__________ today.

      Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect to be able to earn 9% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

       Option B would be worth $__________ today.

       Option C would be worth $__________ today.

       Financial theory supports choosing Option _______

Decision #2: Planning for Retirement

Erich and Mallory are 22, newly married, and ready to embark on the journey of life.   They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $3000 per year to prepare for retirement. Mallory just told Erich, though, that she had heard that they would actually have more money the day they retire if they put $3000 per year away for the next 10 years - and then simply let that money sit for the next 35 years without any additional payments – then they would have MORE when they retired than if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do).   Please help Erich and Mallory make an informed decision:   

Assume that all payments are made at the END a year (or month), and that the rate of return on all yearly investments will be 7.2% annually.  

(Please do NOT ROUND when entering “Rates” for any of the questions below)

1. How much money will Erich and Mallory have in 45 years if they do nothing for the next 10 years, then put $3000 per year away for the remaining 35 years?

2. How much money will Erich and Mallory have in 10 years if they put $3000 per year away for the next 10 years?

b2) How much will the amount you just computed grow to if it remains invested for the remaining

35 years, but without any additional yearly deposits being made?

3. How much money will Erich and Mallory have in 45 years if they put $3000 per year away for each of the next 45 years?

How much money will Erich and Mallory have in 45 years if they put away $250

4. per MONTH at the end of each month for the next 45 years? (Remember to adjust 7.2% annual rate to a Rate per month!)

5. If Erich and Mallory wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away at the end of each year for 20 years in order to have $1,000,000 saved up on the first day of their retirement 45 years from today?