5. Outline the features of Basel 1 and Basel 2 which in your view contributed to the financial crisis.

A fund manager of IMD Securities Ltd quoted:
‘GC Tech has a very high beta since its stock has traded as high as $253 and as low as its current $64 during this year.’
Do you agree with the fund manager? Explain.

Using a binomial tree, what is the price of a $40 strike 6-month put op-
tion, using 3-month intervals as the time period? Assume the following
data: S = 37:90; r = 0:05; = 32:1%
(a) 3.52
(b) 3.66
(c) 3.84
(d) 3.91

What advantages do finance companies have over banks in offering services to small-business customers?

What are differences between an option and a futures contract?

Step by step without financial calculator functions:

Your firm has just issued a 20-year $1,000.00 par value, 10% annual coupon bond for a net price of $964.00. What is the yield to maturity? Don't use a financial calculator to determine your answer.

A) 10.60%

B) 11.10%

C) 10.44%

D) 10.16%

Project L requires an initial outlay at t = 0 of $55,000, its expected cash inflows are $11,000 per year for 9 years, and its WACC is 10%. What is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent. $

Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 11%, and a tax rate of 25%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2, and the current stock price is $32. What is the company's expected growth rate? Do not round intermediate calculations. Round your answer to two decimal places. % If the firm's net income is expected to be $1.0 billion, what portion of its net income is the firm expected to pay out as dividends? Do not round intermediate calculations. Round your answer to two decimal places. (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio)ROE %

1. Compare both projects using NPV if the cost of capital is 10%.
2. Compare each project using the IRR approach.
3. Now compare both projects using the equivalent annual annuity (EAA) method.
4. Compare each project using the replication approach.

Calculate the Macaulay duration of a 9%, $1,000 par bond that matures in three years if the bond's YTM is 12% and interest is paid semiannually. You may use Appendix C to answer the questions.

1. Calculate this bond's modified duration. Do not round intermediate calculations. Round your answer to two decimal places.

     years

2. Assuming the bond's YTM goes from 12% to 11.0%, calculate an estimate of the price change. Do not round intermediate calculations. Round your answer to three decimal places. Use a minus sign to enter negative value, if any.

     %

Capital Structure Analysis

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $10.35 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 55% (based on market values) or decreasing it to 45%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 14% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, r_s, is 14%. If it increases leverage, r_s will be 16%. If it decreases leverage, r_s will be 13%.

Present situation (50% debt):
What is the firm's WACC? Round your answer to three decimal places.
     %
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$   million

55% debt:
What is the firm's WACC? Round your answer to two decimal places.
       %
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$   million

45% debt:
What is the firm's WACC? Round your answer to two decimal places.
       %
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$   million

(a) Total investment risk can be broken down into two types of risk. What are these two types of risk and which should NOT affect expected return? (b) A firm has a beta of 1.2. The expected market return is 12% and the risk-free rate is 2%. What should be the firm’s equity cost of capital?

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps to accent people’s homes. They projected unit sales of these lamps to be 8,400 in the first year, with growth of 5 percent each year for the next five years. Production of these lamps will require $49,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $109,000 per year, variable production costs are $20 per unit, and the units are priced at $48 each. The equipment needed to begin production will cost $189,000. The equipment will be depreciated using the straight-line method over a five-year life and is not expected to have a salvage value. The effective tax rate is 38 percent and the required rate of return is 20 percent. What is the NPV of this project?

1. Use the IRR approach to determine which project to choose.
2. Graph the NPV profiles for each project.
3. At what rate will the two projects have the same NPV?