On January 1, 2017, your brother's business obtained a 30-year amortized mortgage loan for $350,000 at a nominal annual rate of 7.35%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2018 (second-year interest expense on the mortgage)? Answer--$25,361.98
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ABC Trucking's balance sheet shows a total of noncallable $33 million long-term debt with a coupon rate of 7.80% and a yield to maturity of 7.10%. This debt currently has a market value of $49 million. The balance sheet also shows that the company has 13 million shares of common stock, and the book value of the common equity is $379.95 million. The current stock price is $31.15 per share; stockholders' required return, rs, is 16.35%; and the firm's tax rate is 27.00%. The CFO thinks the WACC should be based on market value weights, but the president thinks book weights are more appropriate. What is the difference between the WACCs using market value and the book value?
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| A project has the following cash flows: |
| Year | Cash Flow | |||
| 0 | $ | 59,000 | ||
| 1 | – | 34,000 | ||
| 2 | – | 39,000 | ||
| a. | What is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the NPV of this project if the required return is 12 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| c. | What is the NPV of the project if the required return is 0 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| d. | What is the NPV of the project if the required return is 24 percent? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
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A not-for-profit childcare center wants to expand its services by offering an after-school program. The after-school program would operate 40 weeks per year, 4 hours a day, 5 days a week. The program would have a capacity of 20 students per week, and would charge $80 per student per week. The program will be staffed by two teachers who will each be paid $25 per hour. The program will pay $15,000 a year in rent and utilities, spread evenly throughout the year, and will also pay $200 per week it is open for childcare insurance.
The program will purchase furniture and media equipment at a cost of $10,000. The furniture and equipment are expected to last 5 years and to have no salvage value. In order to purchase the furniture and equipment, the program will take out a bank loan of $8,000 on the first day of operations. The bank loan has an annual interest rate of 4%; no principal repayment will be due during the first year. Supplies will cost $5 per student per week and snacks will cost $3 per student per week.
(a) How many children per week must the center serve in order to break even? Show your calculations. What would you advise the board to decide based on financial criteria?
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Facebook (FB) currently trades at $210.00. You purchase a 23 month European $11.00 strike call option on a short futures contract on one share of FB. The futures delivery date is 43 months from now and the delivery price is $246.00. The risk-free rate is 4.2%. Compute the range of prices of FB 23 months from now that will make you want to exercise your option.
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7
.
You invest $100 in a T-bill with a rate of return of 0.05, and in a risky asset with an expected rate of return of 0.12 and a standard deviation of 0.15.
What percentages of your money must be invested in the risk-free asset and the risky asset, respectively, to form a portfolio with a standard
deviation of 0.06?
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An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $310,000, and annual maintenance costs are estimated to be $8,200 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $210,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $10,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value. MARR is 18 %/year
What is the present worth of each alternative?
Storage tank? $_____
Holding pond?$____
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Use the following information for the next three questions: You have $20,000 available to invest in the market portfolio, which has an expected return of 9% and the risk-free asset, which returns 3%: 18. How would you use your available funds to invest in the market portfolio and the risk-free asset to achieve a beta of 0.9? How much money would you invest in the market? A) $18,000 B) $2,000 C) $4,300 D) $2,180 19. What is the expected return of the portfolio constructed in part a? A) 8.4% B) 6.0% C) 9.0% D) 8.2% 20. If the volatility of the market portfolio is 35%, what is the volatility of the portfolio constructed in part a.? A) 9.9% B) 9.0% C) 28.9% D) 31.5%
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Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $70,000 per year for 8 years. At the beginning of the project, inventory will decrease by $28,800, accounts receivables will increase by $27,400, and accounts payable will increase by $19,800. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $297,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating an aftertax cash flow of $80,000. What is the net present value of this project given a required return of 11.6 percent?
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2. Determinants of market interest rates
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic:
|
Characteristic |
Component |
Symbol |
|---|---|---|
| As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. | ||
| This is the rate on a Treasury bill or a Treasury bond. | ||
| This is the premium added as a compensation for the risk that an investor will not get paid in full. | ||
| Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. | ||
| This is the rate on short-term US Treasury securities, assuming there is no inflation. | ||
| This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. |
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Suppose Potter Ltd. just issued a dividend of $1.82 per share on its common stock. The company paid dividends of $1.36, $1.46, $1.53, and $1.68 per share in the last four years, respectively. If the stock currently sells for $55, what is your best estimate of the company’s cost of equity capital using arithmetic and geometric growth rates? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
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4. Carolina issued a 25-year semi-annual non-callable bond five years ago. Bond has a $1,000 face value, coupon rate of 8% and it currently sells for $925. Carolina needs to issue 20-year semi-annual bond. New bond will be non-callable and is expected to get the same credit rating as outstanding bond issue. If Carolina wants to issue and sell new bond at par, find approximate coupon rate that needs to be assigned to the bond. (Hint: similar bonds/notes should be providing approximately same returns).
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One year ago, your company purchased a machine used in manufacturing for $115000. You have learned that a new machine is available that offers many advantages and you can purchase it for $ 165000 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 $45000 per year for the next 10 years. The current machine is expected to produce a gross margin of $ 22000 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 $ 10455 per year. The market value today of the current machine is $60000. Your company's tax rate is 42%, and the opportunity cost of capital for this type of equipment is 11%. Should your company replace its year-old machine?
The NPV of replacing the year-old machine is $____. (Round to the nearest dollar.)
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A bond has a $1,000 par value, 15 years to maturity, and a 8% annual coupon and sells for $1,080. What is its yield to maturity (YTM)? Round your answer to two decimal places. 7.12 % Assume that the yield to maturity remains constant for the next 2 years. What will the price be 2 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
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Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.7 on the market index. Firm-specific returns all have a standard deviation of 35%.
Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.6%, and the other half have an alpha of −2.6%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha stocks, and shorts $1 million of an equally weighted portfolio of the negative alpha stocks.
a. What is the expected profit (in dollars) and standard deviation of the analyst’s profit?
b. How does your answer change if the analyst examines 40 stocks instead of 20 stocks? 80 stocks?
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