Thatcher Corporation's bonds will mature in 13 years. The bonds have a face value of $1,000 and a 9% coupon rate, paid semiannually. The price of the bonds is $1,150. The bonds are callable in 5 years at a call price of $1,050. What is their yield to maturity? What is their yield to call? Do not round intermediate calculations. Round your answers to two decimal places.
In: Finance
The mortgage on your house is five years old. It required monthly payments of
$1,450,
had an original term of 30 years, and had an interest rate of
10 %10%
(APR). In the intervening five years, interest rates have fallen and so you have decided to
refinance long dash—that
is, you will roll over the outstanding balance into a new mortgage. The new mortgage has a 30-year term, requires monthly payments, and has an interest rate of
6.125 %6.125%
(APR).
a. What monthly repayments will be required with the new loan?
b. If you still want to pay off the mortgage in 25 years, what monthly payment should you make after you refinance?
c. Suppose you are willing to continue making monthly payments of
$ 1450$1,450.
How long will it take you to pay off the mortgage after refinancing?d. Suppose you are willing to continue making monthly payments of
$ 1450$1,450,
and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the refinancing?
(Note: Be careful not to round any intermediate steps less than six decimal places.)
a. What monthly repayments will be required with the new loan?
The monthly repayments with the new loan will be
$969.55969.55.
(Round to the nearest cent.)
b. If you still want to pay off the mortgage in 25 years, what monthly payment should you make after you refinance?
If you still want to pay off the mortgage in 25 years, the monthly repayments will be
$1040.331040.33.
(Round to the nearest cent.)c. Suppose you are willing to continue making monthly payments of
$ 1 comma 450$1,450.
How long will it take you to pay off the mortgage after refinancing?It will take approximately
162162
months. (Round to the nearest integer.)d. Suppose you are willing to continue making monthly payments of
$ 1 comma 450$1,450
and want to pay off the mortgage in 25 years. How much additional cash can you borrow today as part of the refinancing? You can borrow an additional
$6283662836.
(Round to the nearest dollar.)
In: Finance
A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond's current yield? Do not round intermediate calculations. Round your answer to two decimal places.
In: Finance
Charles Dow was the original editor of the Wall Street Journal. He was the originator of "Dow Theory," which holds that the prices of transportation stocks, such as Heartland Express, can predict changes in the price of industrial stocks, such as ExxonMobil. An article in the Wall Street Journal refers to Dow Theory as the "granddaddy of technical analysis."
Source: Spencer Jakab, "Keep on Trucking Despite Dow Theory," Wall Street Journal, July 16, 2012.
Dow Theory is considered technical analysis rather than fundamental analysis because it _______.
A. requires complicated computer programs to generate its results
B. requires analysis of multiple stocks to generate its results
C. relies on forecasting future profits of firms in order to forecast future stock prices
D. relies on patterns of past stock prices to predict future stock prices
Would an investor be able to earn an above-average return on her stock investments by selling industrial stocks whenever she saw declines in transportation stocks and buying industrial stocks whenever she saw increases in transportation stocks?
A. Yes, the long history associated with this theory illustrates its ability to guarantee above-average returns.
B. No, this strategy neglects all available information except for past stock prices.
C. No, this strategy only focuses on expected future returns and neglects past performance.
D. Yes, rational expectations theory predicts that investors employing technical analysis are likely to earn above-average returns
?[Related to the Chapter Opener] The chapter opener states that "many investors who bought stocks in 2000 and held them through 2010 found that they had received a negative real return on their investment over the 10-year period." Why would investors have invested in stocks during those years if they received a negative real return?
A. Investors may have used rational expectations to predict continued growth in the markets.
B. Investors may have believed the high rate of returns from the 1980s would continue.
C. Investors may have used adaptive expectations to formulate their future stock price forecasts.
D. All of the above.
An article in the Economist noted that while economic growth in China was slowing, stocks have more than doubled in value. The article stated that unlike in developed countries where large institutional investors buy the overwhelming majority of the stock purchased, in China 90% of buying is done by individual investors. It described the demand for stock by these investors as a mania.
Source: A Crazy Casino, Economist, May 26, 2015.
What does the article mean when it describes stock buying by individual investors as a mania?
A. Investors are purchasing stock irrationally.
B. Investors are crazy.
C. Investors are enthusiastic about purchasing stock.
D. The demand for stock is incredibly high.
? Individual investors would be More likely to exhibit this behavior than institutional investors.
An article in the Economist in 2016 noted that since 2000, an investor in the United Kingdom would have earned a higher return from buying British government bonds than from buying stock issued by British firms. The article concluded that: There has been a negative equity risk premium this century.
Source: Stocks for the Long Run? Economist, January 13, 2016.
?Equity premium represents the additional return investors must receive in order to invest in stocks.
?Why might the equity risk premium in the United Kingdom have been negative during this period?
A. Banks were paying high interest rates on bonds.
B. The returns on bonds outpaced the returns on stocks.
C. Investors fled to other countries.
D. The returns on stocks outpaced the returns on bonds.
?[Related to Making the Connection] Economist Peter Temin of MIT argues that, If the crash of 1929 was an important independent shock to the economy, then the crash of 1987 should have been equally disastrous.
Source: Peter Temin, Lessons from the Great Depression, Cambridge, MA: MIT University Press, 1989 p. 41.
Which of the following events would be considered important independent shock to an economy?
A. A stock market crash.
B. The breakout of war in the Europe.
C. Inflation.
D. An increase in the Federal Funds rate.
?What reason might Temin give to support his argument that what happened to the economy following the crash of 1987 is evidence against the crash of 1929 being an important shock to the economy?
A. Economic conditions were more severe after the crash of 1929 even though the decline in the market in 1987 was twice as large as the decline in the market in 1929.
B. The market decline in 1929 was twice as large as the market decline in 1987.
C. The market decline in 1987 was twice as large as the market decline in 1987.
D. Economic conditions were more severe after the crash of 1987 because the decline in the market was twice as large as in 1929.
Christina Romer would argue that the impact of the crash of 1929 was more severe because of its effect on consumer confidence as well as the lack of regulations in place at the time.
The business writer Michael Lewis has quoted Michael Burry, a fund manager, as saying: "I also immediately internalized the idea that no school could teach someone how to be a great investor. If that were true, it'd be the most popular school in the world, with an impossibly high tuition. So it must not be true." Do you agree with Burry's reasoning?
Source: Michael Lewis, The Big Short: Inside the Doomsday Machine, New York: W.W. Norton, 2010, p. 35.
A. No, according to the adaptive markets hypothesis, attempting to beat average market returns is a futile exercise.
B. Yes, according to the adaptive markets hypothesis, if you could derive an adaptive model to forecast stock returns, it is possible to earn infinitely high profits.
C. No, according to the efficient markets hypothesis, attempting to beat average market returns is a futile exercise.
D. Yes, according to the efficient markets hypothesis, if you could derive an efficient model to forecast stock returns, it is possible to earn infinitely high profits.
[Related to Making the Connection] A column in the Wall Street Journal, asks the question: Are capital gains so different from earned income that they should be taxed at a different rate?
Source: Scott Sumner and Leonard E. Burman, It Fair to Tax Capital Gains at Lower Rates Than Earned Income? Wall Street Journal, March 1, 2015.
What is a capital gain?
A. A distribution of profit to investors.
B. The increase in capital from one year to the next.
C. An increase in the price of a stock.
D. A profit from the sale of an investment.
In what way are capital gains taxed differently than salary and wage income?
A. Capital gains are adjusted to account for inflation.
B. Salary and wage income is subject to deductibles.
C. Salary and wage income is taxed at a lower rate than capital gains.
D. Capital gains are taxed at a lower rate than salary and wage income.
One economic argument for taxing capital gains differently than
other income is that investors have to pay taxes on their nominal
gain without an adjustment for inflation.
In: Finance
You are trying to get an idea of how predictable a firm future FCF’s will be so you look at the last 10 years FCF’s and find that the average was 25 million and that the standard deviation was 18 million. You decide to find the range of outcomes 95% of the time. How should you interpret this?
a. The range of outcomes are from 7 to 43 million
b. The range of outcomes are from -11 to 61 million and the smaller the standard deviation the lower the total risk
c. The range of outcomes are from -11 to 61 million and the smaller the standard deviation the higher the total risk
d. The range of outcomes are from 5 to 45 million
In: Finance
NPVlong dashMutually exclusive projects Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following table: LOADING.... The firm's cost of capital is 12%. a. Calculate the net present value (NPV) of each press. b. Using NPV, evaluate the acceptability of each press. c. Rank the presses from best to worst using NPV. d. Calculate the profitability index (PI) for each press. e. Rank the presses from best to worst using PI.
| Initial investment | $85,000 | $59,600 | $129,600 | |
| Year | ||||
| 1 | $18,400 | $12,300 | $50,000 | |
| 2 | $18,400 | $14,500 | $29,800 | |
| 3 | $18,400 | $16,000 | $20,400 | |
| 4 | $18,400 | $17,800 | $19,600 | |
| 5 | $18,400 | $20,200 | $19,800 | |
| 6 | $18,400 | $24,800 | $30,300 | |
| 7 | $18,400 | $0 | $40,100 | |
| 8 | $18,400 | $0 | $50,500 |
In: Finance
Your division is considering two projects with the following cash flows (in millions):
| 0 | 1 | 2 | 3 |
| Project A | -$27 | $13 | $17 | $8 |
| Project B | -$25 | $14 | $11 | $2 |
What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
Project A: $ million
Project B: $ million
What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
Project A: $ million
Project B: $ million
What are the projects' NPVs assuming the WACC is 15%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places.
Project A: $ million
Project B: $ million
What are the projects' IRRs assuming the WACC is 5%? Do not round intermediate calculations. Round your answer to two decimal places.
Project A: %
Project B: %
What are the projects' IRRs assuming the WACC is 10%? Do not round intermediate calculations. Round your answer to two decimal places.
Project A: %
Project B: %
What are the projects' IRRs assuming the WACC is 15%? Do not round intermediate calculations. Round your answer to two decimal places.
Project A: %
Project B: %
If the WACC was 5% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)
-Select-Project AProject BNeither A nor BItem 13
If the WACC was 10% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)
-Select-Project AProject BNeither A nor BItem 14
If the WACC was 15% and A and B were mutually exclusive, which project would you choose? (Hint: The crossover rate is 90.37%.)
-Select-Project AProject BNeither A nor B
In: Finance
Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $62.48. The firm just recently paid a dividend of $4.01. The firm has been increasing dividends regularly. Five years ago, the dividend was just $3.01. After underpricing and flotation costs, the firm expects to net $57.48 per share on a new issue. a. Determine average annual dividend growth rate over the past 5 years. Using that growth rate, what dividend would you expect the company to pay next year? b. Determine the net proceeds, Nn, that the firm will actually receive. c. Using the constant-growth valuation model, determine the required return on the company's stock, r Subscript s, which should equal the cost of retained earnings, r Subscript r. d. Using the constant-growth valuation model, determine the cost of new common stock, r Subscript n.
In: Finance
Two projects, Alpha and Beta, are being considered using the payback method. Each has an initial cost of $100,000. The annual cash flows for each project are listed below. a) What is the pay back period in years for Alpha? (round to two decimal places)b) What is the pay back period in years for Beta? (round to two decimal places)
| Year | Project Alpha | Project Beta | |
| 1 | 25,000 | 15,000 | |
| 2 | 25,000 | 25,000 | |
| 3 | 25,000 | 45,000 | |
| 4 | 25,000 | 30,000 | |
| 5 | 25,000 | 20,000 | |
| 6 | 25,000 | 15,000 | |
In: Finance
|
11. The NPV and payback period What information does the payback period provide? Payback period essentially provides the number of years it would take for a project to recover the initial investment from its operating cash flows. As the model was criticized, the model evolved incorporating time value of money to create the discounted payback method. The models still reflected faulty ranking criteria but they provided important information about liquidity and risk. The ______(shorter or longer)____ the payback, other things constant, the greater the project’s liquidity. Suppose Praxis Corporation’s CFO is evaluating a project with the following cash inflows. She does not know the project’s initial cost; however, she does know that the project’s regular payback period is 2.5 years.
If the project’s weighted average cost of capital (WACC) is 8%, what is its NPV? $489,572 $367,179 $469,174 $407,977 Which of the following statements indicate a disadvantage of using the discounted payback period for capital budgeting decisions? Check all that apply. The discounted payback period does not take the time value of money into account. The discounted payback period is calculated using net income instead of cash flows. The discounted payback period does not take the project’s entire life into account. |
In: Finance
|
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $27,000 per month for 15 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 15 years at an estimated cost of $728,000. Third, after he passes on at the end of the 15 years of withdrawals, he would like to leave an inheritance of $650,000 to his nephew Frodo. He can afford to save $2,100 per month for the next 15 years. |
| Required: |
| If he can earn a 11 percent EAR before he retires and a 8 percent EAR after he retires, how much will he have to save each month in years 16 through 30? |
$5,198.12
$6,685.05
$4,994.27
$5,096.20
$6,092.78
In: Finance
A stock price is currently $60. Over each of the next two three-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of $61
In: Finance
In: Finance
A machine purchased 3 years ago for $140,000 is now too slow to satisfy the demand of the customers. It can be upgraded now for $81,000 or sold to a smaller company internationally for $41,000. The upgraded machine will have an annual operating cost of $82,000 per year and a $33,000 salvage value in 3 years. If upgraded, the presently owned machine will be retained for only 3 more years, then replaced with a machine to be used in the manufacture of several other product lines. The replacement machine, which will serve the company now and for a maximum of 8 years, costs $224,000. Its salvage value will be $49,000 for years 1 through 5; $20,000 after 6 years; and $10,000 thereafter. It will have an estimated operating cost of $45,000 per year. Perform an economic analysis at 8% per year using a specified 3-year planning horizon.
a) Determine if the current machine should be replaced now or 3 years from now
b) Once decided, determine the equivalent AW for the next three years.
a) The current machine should be replaced ___.
b) The equivalent AW for the next three years is $ ___ .
In: Finance
How the concept of moral hazard can be applied to the 2008 financial crisis?
In: Finance