Show that a bull spread can be created from a combination of positions in put options and a bond.
In: Finance
14-4 a. For Company LL (Low Leverage),
the total assets is $20,000,000, Debt ratio is 30%, the interest
rate is 10%, tax rate is 40%, and EBIT is $4,000,000. What’s LL’s
return on equity (ROE)? ROE = Net Income / Equity
20,000,000x30%=600,000
Fro Company HL (High Leverage), the
total assets is $20,000,000, Debt ratio is 50%, the interest rate
is 12%, tax rate is 40%, and EBIT is $4,000,000. What’s HL’s return
on equity (ROE)?
b. IF Company LL’s debt ratio is increased to 60%
with interest rate of 15%, and other things remain unchanged as
above, What’s LL’s ROE? Will it be higher than HL’s ROE? If not,
why?
In: Finance
a. Assuming that the expectations hypothesis is
valid, compute the expected price of the four-year zero coupon bond
shown below at the end of (i) the first year; (ii) the second year;
(iii) the third year; (iv) the fourth year. (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Beginning of Year Price of Bond
1. 950.90
2. 899.97
3. 877.62
4. 785.26
b. What is the rate of return of the bond in years
1, 2, 3, and 4? Conclude that the expected return equals the
forward rate for each year. (Do not round intermediate
calculations. Round your answers to 2 decimal
places.)
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The action plan in the Boston Bike Network Plan anticipates spending $30 million in construction costs for work on establishing and renovating 100 miles of bike lanes in the city. The overall goal of the Boston Climate Action Plan is to reduce vehicle miles traveled (VMT) by 5.5% from 2005 levels, which would result in an estimated reduction of 68 thousand tons of CO2 per year. Assume the bike paths and VMT effects last for 30 years, the value of CO2 reduction is $40 per ton (based on another study), and the discount rate is 5%. In years 10 and 20, 10% of the original capital cost is spent for maintenance.
a. Calculate the B/C ratio, net present value, and internal rate of return for the bike path network.
In: Finance
Compare and contrast between:
e.Mutual funds and ETFs
f.Passive and Active investment strategies
g.Fundamental and Technical Analysis
In: Finance
What is the price of a monthly bond (makes payments monthly) that has 20 years to maturity, a coupon rate of 12.00%, and a face value of $1,000 if your required rate of return is an APR of 18.00% with quarterly compounding?
In: Finance
Nine years ago the Templeton Company issued 25-year bonds with an 12% annual coupon rate at their $1,000 par value. The bonds had an 8% call premium, with 5 years of call protection. Today Templeton called the bonds.
a) Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places. %
b) Why the investor should or should not be happy that Templeton called them.
1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
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You are considering two stocks and have determined the following information: Stock A Return Probability of the Return 21 % 50 % 12 10 5 40 Stock B Return Probability of the Return 32 % 10 % 15 60 8 30 Which of the two stocks has the higher expected return? Round your answers to two decimal places. The return on Stock A: % The return on Stock B: % has the higher expected return. Which stock is riskier? Do not round intermediate calculations. Round your answers to two decimal places. Standard deviation of Stock A: Standard deviation of Stock B: is riskier.
In: Finance
Rottweiler Corporation issued 100, $1,000 par value bonds on February 24, 2019. The original bonds' maturity was 20 years, and they have a six percent coupon. Rottweiler used the money to purchase 150 Really Adorable Puppies. The firm hopes to double production of Really Adorable Puppies in the next five to ten years. The company makes all payments on a semiannual basis.
1. What is the value of the bond on February 24, 2020, if the interest rate on comparable debt is 6 percent? What is the current yield? What is the yield to maturity?
2. What is the value of the bond on February 24, 2020, if the interest on comparable debt is 10 percent? What is the current yield? What is the yield to maturity?
3. What is the value of the bond on February 24, 2020, if the interest on comparable debt is 4 percent? What is the current yield? What is the yield to maturity?
4. Draw the time path of value graph (be sure to label all points of interest) of a 6 percent coupon, $1,000 par value bond when interest rates are 4 percent, 6 percent, and 10 percent.
In: Finance
YIELD TO MATURITY
Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.
a) What is the yield to maturity at a current market price of
1. $812? Round your answer to two decimal places. %
2. $1,147? Round your answer to two decimal places. %
b) Would you pay $812 for each bond if you thought that a "fair" market interest rate for such bonds was 13%-that is, if rd = 13%?
1.You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
2. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
3. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
4. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
5. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
In: Finance
Define each of the following terms:
Working capital –
Net working capital –
Net operating working capital –
Explain the following operating current asset investment policies.
Relaxed policy –
Restricted policy –
Moderate policy –
In: Finance
You deposit $5,000 in the bank each year starting today.
The last deposit will be in exactly 20 years’ time.
How much will there be in the bank when you retire in exactly 45 years?
EAR = 10%
In: Finance
For instance, say that you are looking to interview with the manager at PWC and you are looking for information to try to decide whether and how to pursue a career as an Associate. Write a one page ab theout informational interview on what would be the information the manager at PWC would give you .
In: Finance
Define the following terms and list the equation for each.
Inventory conversion period –
Average collection period –
Payables deferral period –
Cash conversion cycle –
What should a firm’s goal be regarding the cash conversion cycle, holding other things constant? Explain your answer.
In: Finance
What are some actions a firm can take to shorten its cash conversion cycle?
What are some costs associated with high inventories? With low inventories?
What is a “supply chain” and how are supply chains related to just-in-time inventory procedures?
Explain how a new firm’s receivables balance is built up over time.
In: Finance