1. Interest Rate Parity, Purchasing Power Parity, International Fisher deEffect Separated by more than 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following information has been collected from the respective areas: Assumptions London New York Spot exchange rate ($/pound) 1.3264 1.3264 One-year Treasury bill rate 1.5% 2.5% Expected inflation rate Unknown 2.0% a. Estimate today's one-year forward exchange rate F between the dollar and the pound using Covered Interest Rate Parity. b. Find approximate expected inflation in London next year. Is it smaller or larger than New York expected inflation? Why? You can do the forecast using PPP or International Fisher Effect. If you use PPP then assume that the Expected exchange rate E(S) is the same as the forward exchange rate F that you found in (a). Then solve for expected inflation in London using PPP formula. If you use International Fisher effect assume that the real interest rates for two countries are the same.

Please explain what should the investor know about Corporate Bonds vs. Municipal Bonds before deciding to invest.

Larry’s best friend, Garfield, owns a lasagna factory. Garfield’s financial skills are not very strong, so he asked Larry to take a look at his financials. Here is the information Garfield provided to Larry for 2019.

- Sales were $23,730

- COGS were $16,780

- Depreciation was $2,840

- Interest paid was $414

- Tax rate was 35%

- The paid dividends were $616  

Garfield also gathered some balance sheet information for 2018 and 2019. The numbers are presented in the following table. December 31, 2018 December 31, 2019 Current Assets $2,940 $3,528 Net Fixed Assets $16,560 $18,840 Current Liabilities $2,592 $2,484

Because Larry is very busy following the current market developments, he asked you to help him. You must

a) Compute the net income

b) Compute the operating cash flow

c) Compute the free cash flow

d) Explain and interpret the positive or negative sign of your answer in part c.

Check point: OCF = $5,511.50

1. What’s the cost of each component of capital and which need to be adjusted?
   • What do the IRR and NPV tell us?
   • what it means for a stock to be in equilibrium?
   • what is a callable bond, when will a bond be called and how that helps/hurts an investor?

PROBLEM # 4:

You are considering investing $300,000 in an activity which will generate a yearly income of $25,000 for the first 5 year, thereafter the income will increase by $7,000 per year for the following 10 years, when the life of the investment will end. You know that the ongoing money market interest rate is 5%.

1. Should you proceed with the investment? (show the equation)
2. Plot the NPW of the investment for i= 3%, 5%, 7%, 8%, 9%, 10% . At what point does the investment becomes unattractive?

Q1) A(n) 8.3% bond matures in 7 years and has a current yield (not YTM) of 6%. The bond's current trading price is $________.

Q2) A 4% coupon bond with 6 months remaining until maturity is currently trading at $997.26. Assume semi-annual coupon payments. The bond's YTM is__________%.

If you can do both, please do! Thank you.

Peter and Blair recently reviewed their future retirement income and expense projections. They hope to retire in 29 years and anticipate they will need funding for an additional 21 years. They determined that they would have a retirement income of $62304 in today's dollars, but they would actually need $45000 in retirement income to meet all of their objectives. Calculate the total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent. The total amount that Peter and Blair must save if they wish to completely fund their income shortfall, assuming a 4 percent inflation rate and a return of 8 percent is $______________

Suppose that one year US and Polish rates are 2.5% and 6.5% respectively. One year US inflation forecast is 1.5%. What should be the expected inflation rate in the Poland if we can assume that International Fisher Effect holds? [Hint: Use accurate Fisher Effect formula on slide #5 in Parity Relationships-2 ; do not use approximation]

a. 0.90%

b. 5.46%

c. 1.50%

d. 6.50%

If the interest rate is 11%, what is the Equivalent Annual Cost (EAC) of the following machine: Cost: $9,000 Life: 10 years Annual cost to operate: $2,000 Answer to 2 decimal places, for example 970.12

On January 1, 2015 IBM leases an equipment from Omaha Inc. for an annual lease rental of $20,000. The lease term is five years and the lessor's interest rate implicit in the lease is 8%. The lessee's incremental borrowing rate is 8.25%. The useful life of the equipment is five years and its estimated residual value equals its removal cost. Annuity tables indicate that the present value of an annual lease rental of $1 (at 8% rate) is $3.993. The fair value of leased equipment equals the present value of rentals. (Assume the lease is capitalized.) Required: Prepare IBM’s accounting entries for 2015. Compute and illustrate the effect on the income statement for the year ended December 31, 2015, and for the balance sheet as of December 31, 2015. Construct a table showing payments of interest and principal made every year for the five-year lease term. Construct a table showing expenses charged to the income statement for the five-year lease term if the equipment is purchased. Show a column for (1) amortization, (2) interest, and (3) total expenses. In one paragraph, discuss the income and cash flow implications from this capital lease.

Six years from today you need $10,000. You plan to deposit $1,600 annually, with the first payment to be made a year from today, in an account that pays a 6% effective annual rate. Your last deposit, which will occur at the end of Year 6, will be for less than $1,600 if less is needed to reach $10,000. How large will your last payment be? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Manchester Inc. must purchase $10,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 8% and would be amortized over 5 years, with 5 end-of-year payments. Manchester can also lease the equipment for 5 end-of-year payments of $2,300,000 each. How much larger or smaller is the bank loan payment than the lease payment?

Equipment associated with manufacturing small railcars had a first cost of $210,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $650,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 37%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be_____ $ .

Kiko​ Peleh's Puts. Kiko Peleh writes a put option on Japanese yen with a strike price of $ 0.008000 divided by yen ​(yen 125.00 divided by $​) at a premium of 0.0080 cents per yen and with an expiration date six month from now. The option is for ​¥12,500,000. What is​ Kiko's profit or loss at maturity if the ending spot rates are yen 110 divided by $​, yen 115 divided by $​, yen 120 divided by $​, yen 125 divided by $​, yen 130 divided by $​, yen 135 divided by $​, and yen 140 divided by $.