9..Consider the following data for a one-factor economy. All portfolios are well diversified.

Portfolio                 E(r)              Beta

A                           12%               1.2

F                             6%                0.0

Suppose that another protfolio E is well diversified with a beta of 0.6 and expected return of 7%.

Construct an arbitrage strategy by investing $1 in the long position and $1 in the short position. What is the profit for the arbitrage strategy?

Your answer should be in dollars and accurate to the hundredth.

The Paulson Company's year-end balance sheet is shown below. Its cost of common equity is 14%, its before-tax cost of debt is 9%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $1,103. The firm has 576 shares of common stock outstanding that sell for $4.00 per share.

Calculate Paulson's WACC using market-value weights. Round your answer to two decimal places. Do not round your intermediate calculations.

A stock is trading ex-rights; the market price per share of common stock is $75; the number of rights needed to buy one new share is 3, and the value of a right is 5. Calculate the subscription price.

• A. 60
• B. 65
• C. 70
• D. 80

The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $15 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.2 million with a 0.2 probability, $2.4 million with a 0.5 probability, and $0.7 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.

Debt/Capital ratio is 0.

Debt/Capital ratio is 10%, interest rate is 9%.

Debt/Capital ratio is 50%, interest rate is 11%.

Debt/Capital ratio is 60%, interest rate is 14%.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $25.00 million. The plant and equipment will be depreciated over 10 years to a book value of $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.35 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.54 million per year and cost $1.59 million per year over the 10-year life of the project. Marketing estimates 11.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 21.00%. The WACC is 10.00%. Find the NPV (net present value).

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $28.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.38 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.98 million per year and cost $2.33 million per year over the 10-year life of the project. Marketing estimates 17.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 27.00%. The WACC is 15.00%. Find the IRR (internal rate of return).

Narelle borrows $600,000 on a 25-year property loan at 4 percent per annum compounding monthly. The loan provides for interest-only payments for 5 years and then reverts to principal and interest repayments sufficient to repay the loan within the original 25-year period. Assume rates do not change.

a) Calculate the monthly repayment for the first 5 years. (CLUE: it is INTEREST ONLY)

b) Calculate the new monthly repayment after 5 years assuming the interest rate does not change. (You need the repayment required to amortise the loan to $0 in remaining 20 years)

c) Calculate the total repayments over the life of the loan.

d) Has she paid more or less than she would have if she took a principal and interest loan at the outset? Demonstrate showing your workings.

e) Why might she choose interest-only loan terms?

PLEASE EXPLAIN ANSWER WITHOUT CALCULATING FROM EXCEL

How is it possible that dividends are so important, but, at the same time, dividend policy is irrelevant? Without taxes or any other imperfections, why doesn’t it matter how the firm distributes cash?

Consider the following bonds currently traded in the market. Using this information find the no-arbitrage price of a 5-Year bond with a coupon of 5%. Suppose this bond is currently selling for $102 in the market. Is there an arbitrage opportunity? Explain how you would execute this arbitrage (All coupons are annual payment, including the bond you are asked to price)

Mesa Blanca decides to invest $5 million in Action Technologies. Expected exit valuation is $125 million and time to exit is 5 years. Mesa Blanca wants a 50% / year return and expects future dilution of 60%.

What might lead Mesa Blanca to expect future dilution of 60%?

What would the pre and post money valuation, and % ownership Mesa Blanca require at the time of their investment?

What does this analysis suggest about Action Technologies?

Your firm is contemplating the purchase of a new model commercial airplane which is more fuel efficient that the models your firm is currently flying. On the basis of capital budgeting techniques that we have learned and used, thus far, what are the factors that you will consider in deciding whether or not to purchase and add the newer model planes to your fleet. Explain thoroughly.

1. Price a European Call & Put and an American Put on a stock that is currently selling at $25 and has a volatility of 25%. The options all have a life of 7 months and a strike price of $26. The 7-month risk free rate is 3% per annum with continuous compounding. a. Use a 12-step binomial tree to price all 3 options b. Use a 13-step binomial tree to price all 3 options c. Use the Black-Scholes-Merton formula to price the European options

2. Use the information in question 1, but now the stock will pay a dividend of $1 in 3 months from today. Price European Call & Put and American Call & Put using a 7-step binomial tree.

Looking for answer and explanation in Excel please

The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $4.6 million in annual pretax cost savings. The system costs $9.6 million and will be depreciated straight-line to zero over five years. Wildcat’s tax rate is 21 percent and the firm can borrow at 9 percent. Lambert’s policy is to require its lessees to make payments at the start of the year. Suppose it is estimated that the equipment will have an aftertax residual value of $1,020,000 at the end of the lease.

What is the maximum lease payment acceptable to Wildcat? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Use the following information about Rat Race Home Security, Inc. to answer the questions: Average selling price per unit $331. Variable cost per unit $188 Units sold 488 Fixed costs $5,750 Interest expense $16,184 Based on the data above, what is the degree of financial leverage of Rat Race Home Security, Inc.?

Cash Discounts

Suppose a firm makes purchases of $3.55 million per year under terms of 3/10, net 30, and takes discounts. Assume 365 days in a year for your calculations. Do not round intermediate calculations.

1. What is the average amount of accounts payable net of discounts? (Assume that the $3.55 million of purchases is net of discounts - that is, gross purchases are $3,659,794, discounts are $109,794, and net purchases are $3.55 million.) Round your answer to the nearest dollar.
   $  
   
2. Is there a cost of the trade credit the firm uses?
       -Select-IIIItem 2
   I. There is no cost of trade credit at this point. The firm is using "free" trade credit.
   II. The cost of the trade credit is $291,781.
   
3. If the firm did not take discounts but it did pay on the due date, what would be its average payables? Round your answer to the nearest dollar.
   $  
   If the firm did not take discounts but it did pay on the due date, what would be its nominal cost? Round your answer to two decimal places.
        %
   If the firm did not take discounts but it did pay on the due date, what would be its effective cost? Round your answer to two decimal places.
        %
   
4. What would the firm's cost of not taking discounts be if it could stretch its payments to 39 days? Round your answers to two decimal places.

   Nominal cost	%
   Effective cost	%

After inheriting $50,000 you open up two separate brokerage accounts and divide your

inheritance equally in both accounts ($25,000 in each). You use only these funds to

trade in two stocks for two months at the end of which you clear both your positions and

evaluate your performance. Assume the following:

- You pay $50 per transaction (use only your inheritance as source of funds)

- Call money rate is 3.5% (APR compounded daily – 365 days a year)

- Initial margin is 50% and maintenance margin is 30%. The maximum amount in

‘borrowed’ funds is based on the number of ‘whole’ shares.

- Only your equity funds in the short arrangement earn interest.

- Treat each account separately for purposes of this assignment.

On 7/1 you did the following:

1. Buy stock SOFT for $40 (account 1) and short stock XESLA for $250 (account 2)

using initial margin is 50% in each of the two accounts. Provide the following

information (it is advisable to answer 1 and 2 one account at a time):

a. For each account, describe the price change (increase or decrease) that would

be desirable.

b. Number of shares bought/sold of each stock.

c. Amount of money borrowed for the margin trade in each account.

d. The price will you receive a margin call for each account.

2. Suppose you close out of each position at the end of the two months at the following

prices:

a. Suppose SOFT price has increased to $50.

b. Suppose SOFT price has decreased to $30.

c. Suppose XESLA price has increased to $275.

d. Suppose XESLA price has decreased to $225.

For each ending price, evaluate your performance by computing the following:

• The holding period return of each account2

• The annualized holding period return of each account.

3. Assume that you did not pay brokerage fees what would be the difference in

performance in each account in #2 above?

4. Compute the holding period return of the combined accounts (portfolio) when the

prices of the stocks increase (ignore # 3 above).