TEK wishes to hedge a EUR4,000,000 account receivable arising from a sale to Olivetti (Italy). Payment from Olivetti is due in three months. TEK’s Italian unit does not have ready access to local currency borrowing, eliminating the money market hedge alternative. Citibank has offered TEK the following quotes:

1. What are the costs of its payment hedging alternatives if it uses the forward and options market?

Consider the following information on two securities Expected rate of return on Security Ri = 0.10 Expected rate of return on Security Rj = 0.20 Variance of ROR of security Ri = 0.16 Variance of ROR of security Rj = 0.25 Covariance between Ri and Rj = -0.04 (minus 0.04)

Obtain the

1. the investment fractions to obtain the Global Minimum Variance Portfolio
2. Expected rate of return on Global Minimum Variance Portfolio
3. Variance of Global Minimum Variance Portfolio
4. Is your portfolio diversified? Whatever your answer you must explain the reason for your answer.
5. If you need to draw a graph how the graph of the efficient frontier will look for the correlation structure given above. (

   Obtain the

6. the investment fractions to obtain the Global Minimum Variance Portfolio
7. Expected rate of return on Global Minimum Variance Portfolio
8. Variance of Global Minimum Variance Portfolio
9. Is your portfolio diversified? Whatever your answer you must explain the reason for your answer.
10. If you need to draw a graph how the graph of the efficient frontier will look for the correlation structure given above. (Draw a graph to discuss your answer). Do not forget to write down the legends on X and Y axis)
11. What is the threshold coefficient of correlation above which diversification will not be possible?
12. a graph to discuss your answer). Do not forget to write down the legends on X and Y axis)
13. What is the threshold coefficient of correlation above which diversification will not be possible?

2 Factors that cause the current value to be less than future value are opportunity cost and risk/uncertainty?

Explain why with a real-life example

You will receive annual payments of $15,000 for the next 25 years. You would like to have your money today instead of waiting of waiting 25 years to receive it all. What is the equivalent value of this future stream of payments if the appropriate discount rate is 8%?

A. 148,421.91

B. 160,121.64

C. 183,926.48

D. 201,448.72

You have a 5-year investment holding horizon, would like to earn an 5% annual compound return each year, and have a choice between two different bonds. Whatever amount of money you have to invest will be invested in Bond 1 or Bond 2 (with the number of bonds to be purchased to be determined later).

Find the Duration and Modified Duration for each bond (be sure to show your work and answer the questions below for credit)

• Bond 1 has a 5% annual coupon rate (i.e., a $50 coupon at the end of each year), and an  $1000 maturity value, n = 5 years, YTM = 5% (pays a $50 annual coupon at the end of each year and $1,000 maturity payment at maturity at the end of year 5).  

• Bond 2 is a zero coupon bond with a $1000 maturity value, and n = 5 years; YTM= 5%. (The zero coupon bond has no coupon payments; only a $1,000 maturity payment paid at maturity at the end of year 5).

a. Price Bond 1 ______________           Price Bond 2 _____________

b. Duration Bond 1 ______________    Duration Bond 2 ____________

c. Modified Duration Bond 1 ______ _   Modified Duration Bond 2 ____________

d. Which of the two bonds should you choose for your 5-year investment horizon to duration match to ensure your desired 10% annual compound return if you hold either bond to maturity (i.e. for 5 years)? Explain why. (assume the same default risk for each bond).  

__________________________________________

e.  If interest rates go up by 1%, what will be the % Change in the market value for each Bond’s Price? (Hint Change in Price % = - Modified Duration x Change in Rate (expressed as a fraction, i.e. .01).

% Change in Price for Bond 1 ________% Change in Price for Bond 2 ____________

f.  Which of the 2 bonds has more price risk, and which has more reinvestment risk? Explain why.

If the APR is 8% and compounding is weekly, what is (a) the periodic rate and (b) the EAR?

Can you explain step by step, how to understand the question?

Prepare an amortization spreadsheet in Excel.  The sheet should be labeled, and I should be able to change purchase price, interest rate, or the other relevant factors and the spreadsheet should automatically update. As we discussed in class, spend some time labeling the spreadsheet and using proper cell references.  This is the first but not the last spreadsheet of this type, it is highly likely that elements of this spreadsheet will be helpful in subsequent assignments, so time spent here may mean less time in the future.

For an initial calculation, assume you are purchasing a $400,000 home with 5% down at an interest rate of 4%, financed over 30 years using a traditional mortgage.

Suppose you borrow $8,000 and agree to repay the loan in 4 equal installments over a 4-year period. The interest rate on the loan is 13% per year. What is the amount of the reduction in principal in year 2?

A. $1,040 B. $1,864 C. $2,690 D. $826 E. $2000

Suppose you win $100 million in lottery. The money is paid in equal annual installments of $4 million over 25 years. If the appropriate discount rate is 10%, how much is the sweepstakes actually worth today?

A. $100,000,000 B. $4,000,000 C. $36,308,160 D. $42,699,100 E. $45,537,760

To buy a new house, you must borrow $270,000. To do this, you take out a $270,000, 30-year, 9% mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principal and 9% interest on the declining balance. How large will your annual payments be? A. $24,334 B. $26,281 C. $25,000 D. $82,809 E. $107,651

Please show steps on how to work it out

You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which distributes alcohol, while the other manufactures bottles for brewers and beverage companies. The company is considering a capacity expansion project in the alcohol distribution division, and the Board of Directors has asked you to provide a financial analysis of the project.

• The project would require an initial investment of $100 million for a new distribution center. In addition, $20 million in additional working capital would need to be committed to the project. The working capital will be recovered at the end of the project life.

• The distribution center facilities would be depreciated on a straight-line basis over five years. At the end of five years, you estimate that the center will be sold for $20 million.

• The distribution center is expected to generate cash revenues of $85 million per year and cash operating costs of $50 million per year in each of the next five years.

• The corporate tax rate is 40%.

• The book value of ABC’s assets is $20 billion, while the book value of its outstanding debt is

  $5 billion. ABC’s equity has an estimated beta of 1.2.

• The expected return on the market portfolio is 15%, while the risk-free rate of return is 5%.

• ABC could issue new debt at a yield to maturity of 8%.

• Companies that operate purely in the bottle manufacturing industry have an average beta of 1.5 and an average debt-equity ratio (measured at market value) of one quarter.

• Companies that operate purely in the alcohol distribution industry have an average beta of 0.5 and an average debt-equity ratio (measured at market value) of two-thirds.

  Based on information above, you are to complete the project analysis to present the Board meeting that is scheduled tomorrow.

1. a) Calculate the weighted average cost of capital.

2. b) Calculate the free cash flow of each year for the expansion project.

3. c) What is the NPV for the project?

1. A firm trading on the New York Stock Exchange just posted extraordinary earnings (income) after its controller implemented a new method of depreciation. Its stock price does not increase at all. Which principle of finance best explains this phenomenon?

2. Martha plans to graduate as a nurse next year and has begun planning her future with her financial planner. she forecasts her annual income to be 50,000 a year for the next 20 years, and plans to spend approximately 38,000 annually. After working hard during those years and completing her MBA, she plans to significantly increase her annual income in the subsequent 20 years. She expects to earn 90,000 a year in her managerial role. the financial planner informs her the the real risk-free interest rate over the next forty years is expected to be 5% annually.

a. Use the lifetime budget constraint to determine her maximum annual expenditures beginning in twenty years?

b. How is the answer in part (a) if the interest rate is 10%?

c. How does your answer change if she reduces her spending in the first 20 years to 30,000?

d. What is the opportunity cost of the annual $8,000 of additional expenditures in part (a)?

You have been hired as an analyst for Mellon Bank and your team is working on an independent assessment of Daffy Duck Food Inc. (DDF Inc.) DDF Inc. is a firm that specializes in the production of freshly imported farm products from France. Your assistant has provided you with the following data for Flipper Inc and their industry.

1. In the annual report to the shareholders, the CEO of Flipper Inc wrote, “1997 was a good year for the firm with respect to our ability to meet our short-term obligations. We had higher liquidity largely due to an increase in highly liquid current assets (cash, account receivables and short-term marketable securities).” Is the CEO correct? Explain and use only relevant information in your analysis.

2. What can you say about the firm's asset management? Be as complete as possible given the above information, but do not use any irrelevant information.

3. You are asked to provide the shareholders with an assessment of the firm's solvency and leverage. Be as complete as possible given the above information, but do not use any irrelevant information.

Please use Excel financial functions or algebraic time value of money equations.

Prof. Business has a self-managed retirement plan through her University and would like to retire in 8years and wonders if her current and future planned savings will provide adequate future retirement income. Here’s her information and goals.

Prof. Business wants a 20-year retirement annuity that begins 8 years from today with an equal annual payment equal to $110,000 today inflated at 2% annually over 8 years. Her first retirement annuity payment would occur 8 years from today. She realizes her purchasing power will decrease over time during retirement.

Prof. Business currently has $640,000 in her University retirement account. She expects these savings and any future deposits into her University and any other retirement account will earn 7.5% compounded annually. Also, she expects to earn this same 7.5% annual return after she retires.

Answer the following questions to help Prof. Business finalize her retirement planning.

1.What is Prof. Business’ desired annual retirement income?

2.How much will Prof. Business need 8 years from today to fund her desired retirement annuity?

3.In addition to the $640,000 balance today, Prof. Business will fund her future retirement goal from question 2 by making 8 annual equal deposits at 7.5% compounded annually into her retirement accounts starting a year from today (the last deposit will be made when Prof. Business retires). How large does this annual deposit need to be in addition to the initial $640,000 invested in Prof. Business’ retirement fund?

4.This annual figure from #3 is morethan the Prof.’s current annual contribution, which makes her feel a little anxious about her future planned retirement. Also, Prof. Business’ annual retirement account contribution is based on a percentage of her salary and will increase as her salary increases. So, let’s re-plan her retirement income. Let’s account for the fact that her and the University’s contributions to Prof. Business’ University retirement plan are based on a certain percentage of her salary and will increase as her salary increases. Based on this formula, her first upcoming end of the year deposit will be $20,200 and let’s assume that her annual deposit and salary will grow at a 2% annual rate over the remaining 7 years (8 total deposits) to Prof. Business’ retirement. These deposits are in addition to the $640,000 she currently has today in the University retirement plan. Answer the following based on these assumptions. a)How much money will Prof. Business have in her retirement account immediately after her last deposit 8 years from today? b)What would be the equal annual payment from her 20-year retirement annuity whose first payment occurs exactly 8 years from today?

Your company is planning to borrow $2.75 million on a 7-year, 15%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? Round your answer to two decimal places.