Which method of capital budgeting is considered the most appropriate and why ? (should be 400 words min.)

Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant.

A). Explain Dividends, total assets, EBIT and new common stock.

B).What affect will it  have on the company’s financial statements and which accounts would be impacted ? Explain in detail (min 400 words)

The Kay Company has the following Capital structure as at 31^st March, 2019.

                                    Based on Book Value Based on Market Value             % Costs

            Debentures                300,000                                     330,000                7                 

            Preference                  100,000                                    110,000                9

            Equity                     1,500,000                                   1,700,000            15

            Debt                           200,000                                    180,000              10

            Required :

            Determine the Weighted Average cost of capital using :

1. Book Value weights, include formula used.     
2. Market Value weights, include formula used.
3. What are the factors affecting Cost of Capital, minimum 150 words, explain each factor?                                                  

Consider the balance sheet of Wikileaks Industries as shown below. Because Wikileaks has $900,000 of retained earnings, do you think that the company would be able to pay cash to buy an asset with a cost of $300,000? Why or why not? Give logical arguments to support your answer. (minimum 250 words)

Why is it more important for a company to maximize shareholders wealth, rather than to maximize profits? Discuss with details should be minimum 400 words.

Explain what is the time value of money. (minimum 150 words)

c) A firm has the following capital structure: 100 million shares outstanding, trading at £1.5 per share, and £100 million of debt. The beta of the firm’s stock is 1.5. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2.5 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions.

iv) Suppose the firm changes its capital structure so that its debt increases to £150 million, and the equity decreases by £50 million. What should be the firm’s cost of equity after the change?

*Different question*

c) A firm has the following capital structure: £100 million of equity (market value) with 100 million shares outstanding, and £100 million of debt. The beta of the firm’s stock is 1.6. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions

iv) Suppose the firm changes its capital structure so that its debt increases to £140 million, and the equity decreases to £60 million. What should be the firm’s cost of equity after the change?

What is the difference between RRSP and TFSA? Briefly describe how each one works. What is the advantage of RRSP over TFSA? What is the advantage of TFSA over RRSP? What is the advantage of each (RRSP and TFSA) over a regular taxable investment account?

Probability A B

0.1 (7%) (32%)

0.2 5 0

0.4 10   21

0.2 21 29

0.1 31 38

Stocks A and B have the following probability distributions of expected future returns

A. Calculate the expected rate of return, , for Stock B ( = 11.60%.) Do not round intermediate calculations. Round your answer to two decimal places.

B.Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 19.30%.) Do not round intermediate calculations. Round your answer to two decimal places.

C.Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places.

2. Mrs. D who 27 years old plans to retire at the age of 55. Mrs. D would like to be able to withdraw $132,000 per year from her retirement account for 45 years after retirement beginning the year after her retirement. She is also expecting an inheritance of $54,000 to be transferred to her on her 35th birthday. a How much does she need to have in her retirement account by retirement date if the interest rate is 6% per year during the post-retirement years? b Suppose she already has $12,000 in her retirement investment account that earns 9% per year. What will be the value of this amount by her retirement date? c Given her goal, her expected inheritance, and the investment she already has in 1b, how much does she need to invest per year from now till retirement (at 9% annual rate of return) in order to reach her retirement goal?

NatWest like virtually all financial institutions has as a key focus, asset and liability management. They wish to ensure that there is an adequate spread between return on assets and the cost of funds, liabilities. They are also concerned with the interest rate sensitivity of assets and liabilities as well as their respective liquidity. A key asset for NatWest is in the form of 30-year mortgages with floating interest rates that adjust on an annual basis. NatWest obtains most of its funds by issuing 5-year Certificates of Deposit. It uses the Yield Curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the main driver of affecting the Yield Curve. Assume that the Yield Curve is steeply downward sloping. Based upon the information provided and your understanding of what drives their business model, please answer the following questions:

a. Why is it important to assess the sensitivity of assets and liabilities in a financial institution such as NatWest?

1. We consider to purchase 5-years zero-coupon bond with the nominal value of 1000 USD and YTM of 4 %.  We would like to invest in this bond

1. For 3 years
2. For 7 years

What would be your yield/loss if the day after the bond purchase

1. YTM will increase by 1 %
2. YTM will decrease by 1 %

Please all the explanations. Thank you

NatWest like virtually all financial institutions has as a key focus, asset and liability management. They wish to ensure that there is an adequate spread between return on assets and the cost of funds, liabilities. They are also concerned with the interest rate sensitivity of assets and liabilities as well as their respective liquidity. A key asset for NatWest is in the form of 30-year mortgages with floating interest rates that adjust on an annual basis. NatWest obtains most of its funds by issuing 5-year Certificates of Deposit. It uses the Yield Curve to assess the market’s anticipation of future interest rates. It believes that expectations of future interest rates are the main driver of affecting the Yield Curve. Assume that the Yield Curve is steeply downward sloping. Based upon the information provided and your understanding of what drives their business model, please answer the following questions:

a. Why is it important to assess the sensitivity of assets and liabilities in a financial institution such as NatWest?

b. If the time-weighted value of assets is not the same as that of liabilities, in

effect, what is the financial institution doing and explain why this may or may not be OK.

c. What do we mean by Liquidity Matching and why should this be important to an

institution such as NatWest?

d. Do you think NatWest should use financial futures as a method of hedging? Why or why not.

We would like to invest the amount of 1 000 000 USD for 4 years. There we have zero-coupon bonds with the maturity of 1, 2, 3, 4…and 7 years with a uniform yield of 8 %. On this basis, we create 4 portfolios A, B, C, D such as:

1. What the realized amount of each portfolio (the amount on the end of maturity) will look like, if YTM will decrease by 1 % day after the bonds purchase
2. What the realized amount of each portfolio (the amount on the end of maturity) will look like, if YTM will increase by 1 % day after the bonds purchase

3. What the realized amount of each portfolio will look like, if YTM will decrease by 1 % one day after purchase of the bonds and under this conditions we will sell this bond

4. What the realized amount of each portfolio will look like, if YTM will increase by 1 % one day after purchase of the bonds and under this conditions we will sell this bond