Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar chemical companies. Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). Both firms have a June 30 fiscal year end. You have compiled the data in Table 1 for this purpose. Use a 1-year time horizon and assume the following:

Real gross domestic product is expected to rise 5%;

S&P 500 expected total return of 20%;

U.S. Treasury bills yield 5%; and

30 year U.S. Treasury bonds yield 8%.

1. Calculate the value of the common stock of LCC and AOC using the constant growth dividend discount model. Show your work.                                

2. Calculate the expected return over the next year of the common stock of LCC and AOC using the capital asset pricing model, Show your work.                

3. Calculate the internal (implied, normalized, or sustainable) growth rate of LCC and AOC. Show your work.                                                     

4. Recommend LCC or AOC for investment. Justify your choice by using your answers to A, B, C and the information in Table 1.                                 

4. A project in Hong Kong costs Hong Kong dollar (HKD) 100,000 and produces cash flows of HKD 40,000 per year for four years. Gruner, a Swiss firm using Swiss franc (CHF), is interested in adopting this project. If this had been a domestic project, the discount rate would have been 14 percent, Forecasts of inflation rates over the next four years indicate inflation of 2.5 percent in Switzerland and 5 percent in Hong Kong. Spot CHFHKD is 6.2

a. What is the appropriate discount rate for HKD cash flows? Using this discount rate, calculate the project NPV in HKD.

b. Making appropriate assumptions and using data given in the problem, forecast future values of CHFHKD.

c. Estimate CHF cash flows, and calculate the project NPV in CHF. Are HKD and CHF project NPVs different?

                                     Fixed Rate                                      Floating Rate
Company A                         5.50% LIBOR + 1.05%
Company B                          6.75%                                         LIBOR + 1.75%
Assuming comparative advantage and the agree upon rate of 6.45%, after entering into an interest rate swap determine the cost of financing for Company A and Company B. Who are the main users of interest swaps and currency swaps?
6. A U.S. investor purchased stock in Toyota, the rate of return on the stock in yen was 8.65% and the yen appreciated by 2.34%, determine the exact total return to the investor.

5. (5 pts) Consider a 125,000 euro futures contract in which the current future price is $1.232 per euro. The initial margin requirement is $2,310 per contract, and the maintenance margin requirement is $2,100 per contract. You go short 10 contracts and meet all margin calls but do not withdraw any excess margin. Assume that on the first day, the contract is established at the settlement price, so there is no mark-to-market gain or loss on that day.

b. How much are your total gains or losses by the end of day 4?

Suppose you are expected to receive $5,000 per month, 10 years from now for 15 years. How much you would pay per month for 10 years if you are required to start payment today? (Assume interest rate i⁽¹²⁾ is 6.5%).

Thanks!

3. Explain the law of small numbers and how it impacts financial decisions.

1. Many of the concepts you have studied in finance rely implicitly on efficient markets, i.e., capital budgeting, the relationship between risk and return, asset allocation and even the rule that managers should try maximize shareholder wealth. However, there is a great deal of evidence over the last 30 years that markets may not be efficient and thus these concepts may not hold empirically. Take one idea from what you learned in behavioral finance use it to explain why markets may not be efficient.

4. Explain asymmetric loss aversions and how it impacts financial decisions.

If you invest today SR2,500 every year until the end of 20^th year at the rate of interest of 4.5% for the first 15 years and 5% thereafter, what is the value of your investment at the end of 25 years

Discuss why a firm’s book value may differ significantly from its market capitalization or enterprise value Identify 3-4 factors that could cause the market cap to greatly exceed book value. How or why should book value impact the valuation of a firm? When might you use book value as a measure of a firm’s value? Discuss how balance sheets items could affect your valuation of a firm. Provide examples.

A city water and​ waste-water department has a​ four-year-old sludge pump that was initially purchased for​ $65,000. This pump can be kept in service for an additional four​ years, or it can be sold for $35,500 and replaced by a new pump. The purchase price of the replacement pump is ​$49,500. The projected MVs and operating and maintenance costs over the​ four-year planning horizon are shown in the table that follows. Assuming the MARR is 88​%,

​(a) determine the economic life of the challenger and ​(b) determine when the defender should be replaced.

   Defender       Challenger  
Year   MV at EOY   O&M Costs   MV at EOY   O&M Costs
1   24,500   17,500   38,500   13500
2   21,500   20,500   30,500   16,500
3   18,500   23,500   22,500   19,500
4   15,500   26,500   14,500   22,500
              

Nissan’s all-electric car, the Leaf, has a base price of $32,780 in the United States, but it is eligible for a $7500 federal tax credit. A consulting engineering company wants to evaluate the purchase or lease of one of the vehicles for use by its employees traveling to job sites in the local area. The cost for leasing the vehicle will be $4200 per year (payable at the end of each year) after an initialization charge of $2500 paid now. If the company purchases the vehicle, it will also purchase a home charging station for $2200 that will be partially offset by a 50% tax credit. If the company expects to be able to sell the car and charging station for 40% of the base price of the car alone at the end of 3 years, should the company purchase or lease the car? Use an interest rate of 10% per year and annual worth analysis