Caviar Fishfarm Ltd (‘CFL’) is unlevered, has an equity beta of 1.25 and unlevered cash flows of $76,800 per annum that will continue in perpetuity. The expected market return is 10%p.a and Treasury bills earn 2%p.a. CFL is currently considering issuing $300,000 in new debt with an 8% interest rate. CFL would repurchase $300,000 of its own shares, using the proceeds of the debt issue. There are currently 32,000 shares outstanding and the company’s effective marginal tax rate is 34%. Assuming it is certain that the company completes the restructure, calculate the value of each share in the company, after the restructure (ignore other information effects). (in dollars to nearest cent)

Problem Set 1

You are the owner of a large data-services firm and are deciding on the purchase of a new hardware cooling system that you expect will yield $233,300 in cost-savings per year for the next 15 years. The installation of this cooling system will cost $3,000,000.

1. At face value, does this system seem profitable? By how much?

2. Assume that your company uses a discount rate of 6%.

a. What is the Net Present Value (NPV) of this project?

b. How does the NPV of this project change as you assume a higher or lower discount rate? Why?

c. What is the IRR/ROI of this project? d. How much should the yearly cost-savings be in order to break even? i. (hint) use goal-seek/what-if analysis

3. Suppose that you decide to finance the purchase of this system through a loan from the bank. The bank is willing to loan this money over an 8 year term at an interest rate of 4% per year. a. Using a 70/30 debt-to-equity ratio, what is the NPV of this project? i. (hint) calculate the yearly payment using excel function “PMT” b. How does the NPV of this project change if a larger portion is financed through equity (e.g. debt-to-equity ratio of 60/40)? Why?

Of the following investments, which has the lowest risk?

Question 23 options:

In general, the riskier an investment, the greater the opportunity for a large return.

Question 24 options:

In a bond offering, financial advisors MOST often buy bonds of the company ________.

Question 26 options:

Defensive stocks usually have a stock price that is greatly affected by the state of the economy.

Question 29 options:

A utility company that pays a good dividend can best be characterized as a growth stock.

Question 30 options:

Commercial banks are financial institutions that raise funds from businesses and individuals in the form of checking and savings accounts and use those funds to make loans to businesses and individuals.

Question 16 options:

An agreement between the owner of a brand and another company or individual who pays a royalty for the use of the brand in association with a new product is brand ________.

Question 5 options:

A package contains a snack food bag with a manufacturer's brand and a container of dip with the brand of a different manufacturer. This is an example of a(n) ________ brand.

Question 6 options:

Last year Carson Industries issued a 10-year, 12% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,060 and it sells for $1,150.

1. What is the bond's nominal yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   What is the bond's nominal yield to call? Do not round intermediate calculations. Round your answer to two decimal places.
   %
   
   Would an investor be more likely to earn the YTM or the YTC?
   -Select-Since the YTC is above the YTM, the bond is not likely to be called.Since the coupon rate on the bond has declined, the bond is not likely to be called.Since the YTM is above the YTC, the bond is likely to be called.Since the YTC is above the YTM, the bond is likely to be called.Since the YTM is above the YTC, the bond is not likely to be called.Item 3
   
2. What is the current yield? (Hint: Refer to Footnote 7 for the definition of the current yield and to Table 7.1.) Round your answer to two decimal places.
   %
   
   Is this yield affected by whether the bond is likely to be called?
   1. If the bond is called, the current yield and the capital gains yield will both be different.
   2. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
   3. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
   4. If the bond is called, the current yield and the capital gains yield will remain the same.
   5. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
   
   -Select-IIIIIIIVVItem 5
   
3. What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calcuation, if reqired. Round your answer to two decimal places. Enter a loss percentage, if any, with a minus sign.
   %
   
   Is this yield dependent on whether the bond is expected to be called?
   1. If the bond is expected to be called, the appropriate expected total return will not change.
   2. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.
   3. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.
   4. If the bond is expected to be called, the appropriate expected total return is the YTM.
   5. If the bond is not expected to be called, the appropriate expected total return is the YTC.

Two banks in the area offer 30-year, $250,000 mortgages at 5.2 percent and charge a $3,900 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I. M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee). What are the EARs on these two loans? What are the APRs? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Question #9

Calculating NPA and IRR LO1,5 A project that provides annual cash flows of $11,700 for nine years’ costs $63,000 today is the a good project if the required return is 8 percent? What if it’s 20 percent? At what discount rate would you be indifferent between accepting the project the project and rejecting it?    

What is the main advantage of the geometric mean in regards to Real Estate Investment?

Venture capital financing is a type of funding which assembles cash from investors and lends it to startup businesses that have high potential for success. Venture capital investments usually encompass very high risk; however, the reward has the potential to exceed the risk. The process for acquiring venture capital financing sometimes is complicated, but generally there are five stages in the process of procuring venture capital financing.

Respond to the following in a minimum of 175 words: 

Discuss the five main stages in the process of venture capital financing. 

Nine years ago the Templeton Company issued 25-year bonds with an 12% annual coupon rate at their $1,000 par value. The bonds had an 8% call premium, with 5 years of call protection. Today Templeton called the bonds.

1. Compute the realized rate of return for an investor who purchased the bonds when they were issued and held them until they were called. Round your answer to two decimal places.
   
   %
   
2. Why the investor should or should not be happy that Templeton called them.
   1. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they can now do so at higher interest rates.
   2. Since the bonds have been called, interest rates must have risen sufficiently such that the YTC is greater than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.
   3. Since the bonds have been called, investors will receive a call premium and can declare a capital gain on their tax returns.
   4. Since the bonds have been called, investors will no longer need to consider reinvestment rate risk.
   5. Since the bonds have been called, interest rates must have fallen sufficiently such that the YTC is less than the YTM. If investors wish to reinvest their interest receipts, they must do so at lower interest rates.

You have just won a $5,000,000 lottery! You can collect $3,000,000 now or wait 5 years to collect the full amount. Assume an APR of 5%. Which is the best alternative?

How much money do you need to invest now, to have $50,000 in 10 years?  Assume an APR of 4.5%.

Problem 1

Assume the T-bill maturity and futures delivery are on the same day. Ignore transactions costs.

Treasury Bill

Maturity          DTM               Bid                  Asked                                    

Mar                 90                    1.18                 1.17                                        

Index Futures

S&P 500 Index (CME)

                        Open               High                Low                 Settle

Mar                 1,905.00          1,911.00          1,901.00            1,907.70

S&P 500 closed at $1,910.00 on the same day.

1. Find the discount factor using the T-bill data. Please use the “Bid” yield for the calculation.

2. Suppose that if you buy one unit of S&P 500 index today, you will be entitled to a $10.00 dividend on the delivery day. Consider the following zero-net-investment strategy: buy S&P 500 index spot, borrow at the risk-free rate, and short the S&P 500 futures. Make sure your positions add up to zero at t=0. Show the cash flows from all your positions in the following table, per unit.

3. Considering that each S&P 500 futures contract is for 250 units of the index, what is your total arbitrage profit per 1000 contracts?

Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town and tries to sell it but to no avail. Finally, ACME studios offers to buy the script for either (a) $10,000 or (b) 1 percent of the movie’s profits. There are two decisions the studio will have to make. The first is to decide if the script is good or bad; the second is to decide if the movie is good or bad. First, there is a 90 percent chance that the script is bad. If it is bad, the studio does nothing more and throws the script out. If the script is good, it will shoot the movie. After the movie is shot, the studio will review it, and there is a 60 percent chance that the movie is bad. If the movie is bad, the movie will not be promoted and will not turn a profit. If the movie is good, the studio will promote heavily; the average profit for this type of movie is $14.2 million. Carl rejects the $10,000 and says he wants the 1 percent of profits.

What is value of accepting 1 percent of the profits? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32..)

On September 3, 2008 you invested $1,000 at the annual risk-free rate of 7% until APR. 18, 2009. Calculate the amount you will receive on APR 18, 2009 if the annual 5% rate is compounded;

annually

quarterly

monthly

daily

continuously.