Problem 7-17 Abandonment Value

We are examining a new project. We expect to sell 5,600 units per year at $70 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $70 × 5,600 = $392,000. The relevant discount rate is 18 percent and the initial investment required is $1,550,000. a. What is the base-case NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. After the first year, the project can be dismantled and sold for $1,270,000. If expected sales are revised based on the first year’s performance, below what level of expected sales would it make sense to abandon the project? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

A Japanese company has a bond outstanding that sells for 106 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 11 years.

What is the yield to maturity of this bond?

Use the bond term's below to answer the question
Maturity 7 years
Coupon Rate 4%
Face value $1,000
Annual Coupons
YTM 3% (interest rate)

Assuming the YTM remains constant throughout the bond's life, what is the bond's price in year 4?

A. $1,028.29

B. $1,083.55

C. $1,008.12

D. $1,062.30

The weak form of the efficient-market hypothesis asserts that

A. stock prices do not rapidly adjust to new information contained in past prices or past data.
B. future changes in stock prices cannot be predicted from past prices.
C. technicians cannot expect to outperform the market.
D. stock prices do not rapidly adjust to new information contained in past prices or past data, and
future changes in stock prices cannot be predicted from past prices.
E. future changes in stock prices cannot be predicted from past prices, and technicians cannot
expect to outperform the market.

Select the correct option and explain.

In an efficient market,
A. security prices react quickly to new information.
B. security prices are seldom far above or below their justified levels.
C. security analysis will not enable investors to realize superior returns consistently.
D. one cannot make money.
E. security prices react quickly to new information, security prices are seldom far above or below
their justified levels, and security analysis will not enable investors to realize superior returns
consistently.

Select the correct option and explain.

(Cost of commercial paper​) Tri-State Enterprises plans to issue commercial paper for the first time in the​ firm's 35-year history. The firm plans to issue $400,000 in 270​-day maturity notes. The paper will carry a 10.25 percent rate with discounted interest and will cost​ Tri-State $11,000 ​(paid in​ advance) to issue. Note​: Assume a​ 30-day month and​ 360-day year.

a. What is the effective cost of credit to​ Tri-State?

b. What other factors should the company consider in analyzing whether to issue the commercial​ paper?  

A. Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%. What is the yield to maturity at a current market price of $816? Round your answer to two decimal places. % $1,151? Round your answer to two decimal places. % Would you pay $816 for each bond if you thought that a "fair" market interest rate for such bonds was 13%—that is, if rd = 13%? You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return. 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. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

B.

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 10% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

1. What will the value of the Bond L be if the going interest rate is 6%, 8%, and 11%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L. Round your answers to the nearest cent.

   	6%	8%	11%
   Bond L	$	$	$
   Bond S	$	$	$

2. Why does the longer-term bond’s price vary more than the price of the shorter-term bond when interest rates change?
   1. The change in price due to a change in the required rate of return increases as a bond's maturity decreases.
   2. Long-term bonds have greater interest rate risk than do short-term bonds.
   3. The change in price due to a change in the required rate of return decreases as a bond's maturity increases.
   4. Long-term bonds have lower interest rate risk than do short-term bonds.
   5. Long-term bonds have lower reinvestment rate risk than do short-term bonds.

Consider a project to supply 108 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $1,745,000 five years ago; if the land were sold today, it would net you $1,820,000 aftertax. The land can be sold for $1,756,000 after taxes in five years. You will need to install $5.75 million in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project’s five-year life. The equipment can be sold for $745,000 at the end of the project. You will also need $615,000 in initial net working capital for the project, and an additional investment of $58,000 in every year thereafter. Your production costs are .56 cents per stamp, and you have fixed costs of $1,130,000 per year.

If your tax rate is 24 percent and your required return on this project is 10 percent, what bid price should you submit on the contract?

You have shorted 10 shares in a company at $98. The initial margin was 50% and the maintenance margin is 30%. A few days after the transaction, the company paid $0.6 dividends and after another few days, the shares price went to $110. What is your percentage margin? Provide your answer in percent, rounded to two decimals, omitting the % sign.

Mary, age 27, annually invests $1,000 in an IRA starting this year through the year of her 35th birthday, and then never makes another contribution. Sara, age 36, annually invests $1,000 in an IRA through the year of her 65th birthday. If both Mary and Sara can earn 8% on their investments, who will have more in her IRA account when she retires at the end of her 65th year AND approximately how much more will she have in her account?

Please show the calculator steps please

1. Currently the spot exchange rate is $1.50/£ and the three month forward exchange rate is $1.52/£. The three month interest rate is 8.0% per annum in the US and 5.8% per annum in the UK. Assume that you can borrow as much as $1M. or £1M.

1. Is there a covered interest arbitrage opportunity for a US multinational? What is the payoff if they conducted CIA?
2. Is there a covered interest arbitrage opportunity for a UK multinational? What would be their payoff if they conducted CIA?
3. How will the covered interest rate parity be restored?
4. What should have been the “correct” forward exchange rate?