EOC 2.15

Suppose we observe the following rates:

One-year spot rate = 10%

Two-year spot rate = 14%

Expected one-year rate one year from now = 18%

If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity

premium for year 2?

In August 2019, the Business Roundtable changed the main purpose of a corporation from “to create value for investors” to “to benefit all stakeholder – customers, employees, suppliers, communities and shareholders.” What, if any, benefit do you see in this and how can you foresee this impacting your life?

1) What will be your monthly payment on a $480,000 15 and a 30 yr mortgage if the rate is 3.50 % for people with good credit and 10.5% for people with bad credit 4 calculations? A) Also, how much interest will you pay over the life of the 4 loans you just calculated? (The mortgage is $480,000 (not the price of the house) you may have to adjust a bank rate.com default of 20% down) B) Why would someone finance a house with a 10 year interest only loan (site 3 reasons)?

Appalachian Bank offers you a $135,000, 9-year term loan at 7.5 percent annual interest. What will your annual loan payment be? Semi-annual compounding.

1. Your portfolio consists of 1,000 shares of stock A and 1,000 shares of stock B. At today's market open their respective prices per share are $7.50 and $21. What are their respective weights in the portfolio at today's market open prices? (rounded to two decimals).

   		They have equal weights
   		0.40 and 0.60
   		0.35 and 0.65
   		0.26 and 0.74.

1 points   

QUESTION 32

1. What is your portfolio's beta if stock A's beta is 1.8 and that of B is 0.4.

   		0.76
   		1.10
   		1.00
   		0.9
   		0.86

Based on the CAPM what is the 1-year expected return on stock A, if the risk-free rate is 1% and the expected return on the market is 12%. ?

Given today's open price, what is the expected 1-year return on stock B, if it does not pay dividends, and if you expect that one-year hence the stock will sell for $23.0?

1. Based on the CAPM, stock A is overpriced at today's market open.

   		TRUE
   		FALSE.

   Based on the CAPM stock B is overpriced at today's market open.

   		TRUE
   		FALSE.

   Based on the CAPM what should be the expected return on your portfolio?

   		12.89%
   		11.46%
   		8.99%
   		9.87%
   		9.36%

Diversification is the most effectivewhen the correlation coefficient between two assets’ return is _________ .

     A) positive

     B) negative

     C) +1

     D) 0

     E) -1

Based on investors’ relative degrees of risk aversion,

     A) investors will hold varying amounts of the risky asset in their portfolios.

     B) all investors will have the same portfolio asset allocations.

     C) investors will hold varying amounts of the risk-free asset in their portfolios.

     D) A and C.

     E) none of the above.

Consider a 5.00 percent TIPS with an issue CPI reference of 203.6. The bond is purchased at the beginning of the year (after the interest payment) when the CPI was 211.5. For the interest payment in the middle of the year, the CPI was 213.1. Now, at the end of the year, the CPI is 217.6 and the interest payment has been made.

What is the total return of the TIPS in dollars? Round your final answer to 2 decimal places

What is the total return of the TIPS in percentage? Round your final answer to 2 decimal places.

One year​ ago, your company purchased a machine used in manufacturing for $ 105,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 165,000 today. It will be depreciated on a​ straight-line basis over 10 years and has no salvage value. You expect that the new machine will produce a gross margin​ (revenues minus operating expenses other than​ depreciation) of $ 55,000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 24,000 per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, and has no salvage​ value, so depreciation expense for the current machine is $ 9,545 per year. The market value today of the current machine is $ 45,000. Your​ company's tax rate is 40 %​, and the opportunity cost of capital for this type of equipment is 12 %.

Should your company replace its​ year-old machine?

The NPV of replacing the​ year-old machine is ​$_____. ​(Round to the nearest​ dollar.) Should your company replace its​ year-old machine?  ​(Select the best choice​ below.)

Yes, there is a profit OR No, there is a loss

Question:

A corporate bond with a coupon rate of 6.8 percent has 14 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 7.5 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 8.8 percent. (Assume interest payments are semiannual.)

What will be the change in the bond's price in dollars? Round your final answer to 2 decimal places.

What will be the change in the percentage? Round your final answer to 2 decimal places.

Scenario: As the administrator of a small privately owned not-for-profit hospital that has been seeing a significant increase in patient volume, it has been determined that another wing should be added to accommodate the increase in volume. However, there is not enough cash in reserves to finance the project.

You have been tasked with planning how the capital required for the project can be raised. address the following prompts, citing four to six scholarly sources to support your claims: Capital needs can be met either through equity or debt financing.

Explain the difference between the two and which financing would be appropriate and why, considering that this is a private, not-for-profit hospital.

Explain the term working capital and how it is related to debt financing for capital expenditures.

Discuss the importance of a cash budget and how it can be used to assess the financial viability of this capital expenditure.

Problem 6-07

The following are monthly percentage price changes for four market indexes.

Compute the following.

1. Average monthly rate of return for each index. Round your answers to five decimal places.

   DJIA:

   S&P 500:

   Russell 2000:

   Nikkei:

2. Standard deviation for each index. Do not round intermediate calculations. Round your answers to four decimal places.

   DJIA:

   S&P 500:

   Russell 2000:

   Nikkei:

3. Covariance between the rates of return for the following indexes. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to six decimal places.

   Covariance (DJIA, S&P 500):

   Covariance (S&P 500, Russell 2000):

   Covariance (S&P 500, Nikkei):

   Covariance (Russell 2000, Nikkei):

4. The correlation coefficients for the same four combinations. Use a minus sign to enter negative values, if any. Do not round intermediate calculations. Round your answers to four decimal places.

   Correlation (DJIA, S&P 500):

   Correlation (S&P 500, Russell 2000):

   Correlation (S&P 500, Nikkei):

   Correlation (Russell 2000, Nikkei):

5. Using the unrounded answers from parts (a), (b), and (d), calculate the expected return and standard deviation of a portfolio consisting of equal parts of (1) the S&P and the Russell 2000 and (2) the S&P and the Nikkei. Do not round intermediate calculations. Round your answers to five decimal places.

   Expected return (S&P 500 and Russell 2000):

   Standard deviation (S&P 500 and Russell 2000):

   Expected return (S&P 500 and Nikkei):

   Standard deviation (S&P 500 and Nikkei):

   Since S&P 500 and Russell 2000 have a strong (Select-negative, positive) correlation, meaningful reduction in risk (Select-is not observed, is observed) if they are combined.

   Since S&P 500 and Nikkei have a strong (Select-negative, positive) correlation, meaningful reduction in risk (Select-is not observed, is observed) if they are combined.

​(Cost of​ short-term bank loan​) On July​ 1, 2015, the Southwest Forging Corporation arranged for a line of credit with the First National Bank​ (FNB) of Dallas. The terms of the agreement call for a ​$110 comma 000 maximum loan with interest set at 2 percent over prime. In​ addition, the firm has to maintain a 20 percent compensating balance in its demand deposit account throughout the year. The prime rate is currently 12 percent. Note​: Interest is not paid in advance​ (discounted).
a. If Southwest normally maintains a ​$22 comma 000 to ​$33 comma 000 balance in its checking account with FNB of​ Dallas, what is the effective cost of credit under the​ line-of-credit agreement when the maximum loan amount is used for a full​ year?
b. Compute the effective cost of credit if the firm borrows the compensating balance and the maximum possible amount under the loan agreement.​ Again, assume the full amount of the loan is outstanding for a whole year.

Cash conversion cycle​) Historical data for the​ firm's sales, accounts​ receivable, inventories, and accounts payable for the Crimson Mfg. Company​ follow: LOADING.... a. Calculate​ Crimson's days of sales​ outstanding, days of payables​ outstanding, and days of sales in inventory for each of the 5 years. ​(Assume a​ 365-day year. Hint​: Assume that the​ firm's cost of goods sold equals​ 70% of​ sales.) What has Crimson accomplished in its atempts to better manage its investments in account receivable and​ inventory? b. Calculate​ Crimson's cash conversion cycle for each of the 5 years. Evaluate the​ firm's overall management of its working capital. Assume a​ 365-day year.   

2011   2012   2013   2014   2015
Sales   2,861   3,487   5,264   7,705   12,326
Receivables   410   527   728   901   1,425
Acounts payable   270   454   475   1,045   1,606
Inventories   220   315   414   249   257

1. Tables below shows the standard deviations over the last five years and the correlations between the returns of the stocks and the market.

1. Calculate the CAPM beta for each stock. b. Which stock had the greater total risk? Explain. c. Which stock had the greater market risk? Explain. d. Which stock had the greater idiosyncratic (non-market) risk? Explain