Seattle Health Plans currently use zero-debt financing. It's operating income (EBIT) is $1 million, and it pays taxes at a 40% rate. It had $5 million in assests, and because it is all equity financed, $5 million in equity. Suppose the firm is considering replacing half of its equity financing with debt financing bearing an interest rate of 8%.

A. What impact would the new capital structure have on the firm's net income, total dollar return to investors and ROE?

B. Redo the analysis, but now assume that the debt financing would cost 15%

C. Return to the initial 8% interest rate. Now assume that EBIT could be as low as %500,000 or as high as $1.5 million. There remain a 60% chance that EBIT would be $1 million.

D. Repeat the analysis required for part a, but now assume that Seattle Health Plan is a not-for-profit corporation and pays no taxes. Compare the results with those obtained in Part a.

the rio rancho corporation financed a $10 million expansion by borrowing $2 million from israel discount bank at an interest rate of 4.75% per year. in addition, the company issued bonds to the public with a face value of $8 million that have both a coupon rate and yield to maturity of 6.75%. if the company's tax rate is 38%, calculate the WACC of this expansion

1. MXN is the symbol for the Mexican Peso. MXN/USD .05. A 2020 Toyota Supra costs $49,000 in the U.S. and 1,200,000 Mexican Pesos in Mexico. Based on this information, please answer the following questions.

1. What is USD/MXP in real currency exchange rate terms?
2. Is the USD over or undervalued?
3. Where am I better off buying the Toyota Supra? In Mexico or in the U.S.?
4. Based on the official/nominal MXN/USD currency exchange rate, what would I expect to pay for the Supra in Mexico?
5. Based on the real cost of the same car in both countries, if Purchasing Power Parity (PPP) were to hold true, what would USD/MXN be?
6. Based on the nominal currency exchange rate, if Purchasing Power Parity (PPP) were to hold true, what would I expect to pay for the Supra in the U.S.?

2) Lizzy owns a costume jewelry store in South Africa. She imports most of her jewelry from Zambia. She reads in the newspaper that Zambia is expected to lower interest rates. Is she better off waiting until Zambia actually lowers interest rates before she imports more jewelry from Zambia or should she import more jewelry now, before interest rates decline in Zambia? Explain your answer.

Problem 4-03 (Algorithmic)

The employee credit union at State University is planning the allocation of funds for the coming year. The credit union makes four types of loans to its members. In addition, the credit union invests in risk-free securities to stabilize income. The various revenueproducing investments together with annual rates of return are as follows:

The credit union will have $2.3 million available for investment during the coming year. State laws and credit union policies impose the following restrictions on the composition of the loans and investments.

• Risk-free securities may not exceed 30% of the total funds available for investment.
• Signature loans may not exceed 10% of the funds invested in all loans (automobile, furniture, other secured, and signature loans).
• Furniture loans plus other secured loans may not exceed the automobile loans.
• Other secured loans plus signature loans may not exceed the funds invested in risk-free securities.

How should the $2.3 million be allocated to each of the loan/investment alternatives to maximize total annual return? Round your answers to the nearest dollar.

What is the projected total annual return? Round your answer to the nearest dollar.

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The USD/MXN spot FX is 18.91. You can borrow or deposit USD for one year at 2.36%. You can borrow or deposit MXN for one year at 8.12%. You get a 1-year FX forward quote from a bank of 20.75 USD/MXN. What is your gain/loss position in millions of USD if you borrow USD 100 mil., convert USD/MXN spot, lend MXN, and lock in your FX rate using the 1-year forward contract? Take to 4 decimals.

5. What are the 4 basic premises for Traditional Finance? Name the 4 and explain each.

6. What are the 4 basic premises for Behavioral Finance? Name the 4 and explain each.

Pelzer Printing Inc. has bonds outstanding with 9 years left to maturity. The bonds have a 9% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen to $910.30. The capital gains yield last year was -8.97%.

A. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places. ____%

B. For the coming year, what is the expected current yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places.  ____%

For the coming year, what is the expected capital gains yield? (Hint: Refer to footnote 7 for the definition of the current yield and to Table 7.1.) Do not round intermediate calculations. Round your answer to two decimal places. ___ %

C. Will the actual realized yields be equal to the expected yields if interest rates change? If not, how will they differ?

1. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors will differ from the YTM.
2. As long as promised coupon payments are made, the current yield will not change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
3. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will cause the price to change and as a result, the realized return to investors should equal the YTM.
4. As long as promised coupon payments are made, the current yield will change as a result of changing interest rates. However, changing rates will not cause the price to change and as a result, the realized return to investors should equal the YTM.
5. As rates change they will cause the end-of-year price to change and thus the realized capital gains yield to change. As a result, the realized return to investors will differ from the YTM.

Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $195 million in a boom year and $86 million in a recession. The company's required debt payment at the end of the year is $120 million. The market value of the company’s outstanding debt is $93 million. The company pays no taxes.

a. What payoff do bondholders expect to receive in the event of a recession? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

b. What is the promised return on the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. What is the expected return on the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

A vehicle costs $10,000 when new and has a trade-in value of $7,200 at the end of four years. Its operating expense is $4,000 per year with an additional $2,000 for tires, tune up and battery at the end of the second year. All values are given in today's dollars. What is the equivalent annual cost of owning this vehicle for four years assuming a 10% market interest rate and expected inflation of 2%?

A) A worker named Hastings lives for two periods (year 0 and year 1) and has to choose his optimal level of education. He has two choices. He can choose to go to school during year 0, in which case he has no earnings during that period; however, in year 1 he earns $220. Alternatively, he can choose not to go to school, in which case he earns $110 in both periods.

Part1. What is Hastings’ present discounted value (PDV) of lifetime earnings if he chooses not to go to school? Assume a discount rate of 10%.

Part2. What is Hastings’ present discounted value of lifetime earnings if he chooses to go to school in year 0? Assume a discount rate of 10%.

Part3. Given your answers to (1) and (2), should Hastings choose to go to school or not? Why?

Part4. Hastings’ sister Patience also lives 2 periods and if she decides not to go to school she also makes $110 in each period. However, if she decides to go to school, she can work part time and earn $50 in year 0 and then earn $220 in year 1. Patience has a discount rate of 0%. Should Patience attend school or not? Show your work

Mark wants to save money to achieve three main objectives.

1º, he would like to be able to retire within 30 years with a retirement income of $23,000 per month for 20 years, with the first payment received 30 years and 1 month from now.

2º, he would like to buy a cabin in 10 years at an estimated cost of $320,000.

3º, after he dies at the end of the 20 year retirement period, he would like to leave a $1,000,000 inheritance to his nephew. Mark can save $2,100 per month (ordinary annuity) for the next 10 years.

In addition, Mark can obtain an effective annual return of 11 percent before retirement and an effective annual return of 8 percent after retirement.

(a) What is the amount of savings that Mark needs to have at the time of retirement?

(b) How much are Mark's savings immediately after buying the cabin?

(c) How much Mark will have to save each month (ordinary annuity contributions) after the purchase of the cabin (i.e. after the year 10 and until the year 30)?

[Please show all work - thanks]

Suppose an agent has $100,000 today that he wants to save for 10 years. Compare the following two savings plans.

Bank A offers the following alternative:

For the first $50,000 the agent obtains 8% p.a. (per annum) for 10 years. For the other amount he obtains 4% p.a. for the first four years. Then he obtains 1% p.a.

Bank B offers the following alternative:

The interest in year 1 is 2%, in year 2 is 4%, in year 3 is 8%, in year 4 is 20%, then for years 5 to 10 the agent obtains 3% p.a.

For both plans, interest payments are reinvested.

(a) The agent maximizes the amount at t=10. Which plan is better? How much more can he spend at t=10, if he chooses the better one?

(b) Suppose bank B wants to match the offer of bank A. Interest rates for years 2 to 10 are as above. What interest rate for the first year must bank B offer the agent so that he gets the same amount as from bank A? [4p]