Your stockbroker has called to tell you about two stocks: Facebook, Inc. (FB) and Tesla, Inc. (TSLA). She tells you that FB is selling for $190.00 per share and that she expects the price in one year to be $240.00. TSLA is selling for $310.00 per share and she expects the price in one year to be $330.00. The expected return on FB has a standard deviation of 15 percent, while the expected return on TSLA has a standard deviation of 35 percent. The market risk premium for the S & P 500 has averaged 6.5 percent. The beta for FB is 1.28 and the beta for TSLA is .32. The 10-year Treasury bond rate is currently 1.80%. Neither FB nor TSLA pays a cash dividend. Required: a) Determine the probability for each stock that you would earn a positive return. b) Determine the probability for each stock that you would earn less than your required rate of return. c) Explain why you would or would not buy either or both of the two stocks

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8. What are the benefits and costs for a bank when it decides to
increase the amount of its bank

capital?

9. The Great Dammam Bank Co. pays an annual dividend of $2 per
share on its common stock.

This dividend amount has been constant for the past ten years and
is expected to remain constant.

Given this, how do you evaluate the current price of a stock of the
firm if your required rate of

return is 5%?

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Explain how real options can be used to inform decisions to reduce the impact of exogenous shocks on the enterprise.

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**Briefly explain the concept of operating leverage. If a
company takes actions that reduce its operating leverage, how is it
going to affect the equity beta of the company? Why?**

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Explain the terms bilateral netting with an example and multilateral netting

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Joe Masters has received a job offer from a large wine retailer. His base salary will be $100,000. He will receive his first annual salary payment one year from the day he begins work. He will also get an immediate $50,000 bonus for joining the company. His salary will grow at 4 percent each year, starting after the first year. Each year he will also receive a bonus equal to 5 percent of his salary. Mr. Masters is expected to work for 20 years. What is the present value of the offer if the discount rate is 7 percent?

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Ramstucky Corp bonds just paid their annual coupon of 4%. They mature in 6 years. The required rate of return on the bonds is 5%. The call price of the bonds is 102, but they are not callable until after the second coupon payment.

- What is the price of the bonds as a percentage of par?
- What is the current yield?
- What is the yield to first call?
- If, immediately after the second coupon payment, the yield to maturity is 4.5% and you sell the bond at that time, what rate of return will you have received over the two years?

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**Briefly explain the concept of operating leverage. If a
company takes actions that reduce its operating leverage, how is it
going to affect the equity beta of the company? Why?**

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**Magic Production Company (MPC) is considering a
recapitalisation plan that would convert MPC from its current
all-equity capital structure to one including some financial
leverage. MPC now has 6 million ordinary shares outstanding, which
are selling for $50.00 each. Currently, MPC shareholders have a
required return of 15%. The expected earnings before interest and
taxes (EBIT) of MPC is $45,000,000 per year for the foreseeable
future.**

**The recapitalisation proposal is to issue $100,000,000
worth of long-term debt at an interest rate of 7.5 per cent and use
the proceeds to repurchase as many shares as possible at a price of
$50.00 per share. Assume there are no market frictions such as
corporate or personal income taxes.**

**a. Calculate the number of shares outstanding and the
debt-to-equity ratio for MPC if the proposed recapitalisation is
adopted.**

**b. Calculate the expected earnings per share (EPS) and
the expected return on equity (ROE) for MPC shareholders under the
proposed mixed debt/equity capital structure. How does it compare
to the EPS and ROE under the current capital
structure?**

**c. Calculate the break-even level of EBIT where earnings
per share for MPC shareholders are the same under the current and
proposed capital structures.**

**For the next question assume Magic Production
Company (MPC) is subject to a 40% corporate income tax
rate.**

**How does financial leverage increase the value of
MPC in the presence of corporate income taxes?
Explain.**

**Show all workings step by step
calculations**

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I'm having trouble putting in words, basically I would like to explain for each bond par/discount/premium, the relationship between coupon rate, current yield and yield-to-maturity. Basically explain the relationship

**Discount Bonds (Price < Par): YTM > Current Yield
> Coupon Rate**

but in the least math terms as possible. Any tips? thanks!

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The following information is taken from the records of XYZ Company: Cash $10,000 Accounts receivables 30,000 Inventory 80,000 Prepaid insurance 6,000 Fixed assets 200,000 Accounts payable 30,000 Notes payable (due in 10 months) 25,000 Wages payable 5,000 Long term liabilities 70,000 Owners’ equity 196,000 The company had sales of $150,000, cost of good sold of 60,000 and a net income of 25,000

MCQ

8-The company’s assets turnover is: A) 1 times B) 0.75 times C) 0.5 times

9. The company’s inventory turnover is: A) 1 times B) 0.75 times C) 0.5 times

10. The company’s Days inventory on hand is: A) 450 days B) 477 days C) 487 days

11. The company’s receivable turnover is: A) 5 times B) 10 times C) 15 times

12. The company’s average collection period is: A) 75 days B) 74 days C) 73 days

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How do liabilities and stockholders’ equity differ? How are they similar? B. Explain how retained earnings and dividends are related? How do cash dividends affect the financial statements? C. How a company can reduce its break-even point?

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The life of the project is 5 years. A feasibility study has been undertaken at a cost of $2 million. The study concluded that at the end of the project the cost of restoring the environment of the mine would be approximately $ 1.2 million. The project would require capital equipment of $8 million. The shipping and installation costs for this equipment are around $40,000. This equipment will be depreciated on a straight‐line basis over the life of the project to a book value of zero. At the end of the project, the equipment will be salvaged for $30000 but half of this amount will be used up for cleaning up costs and strengthening the foundations of the floor directly below the equipment when the equipment is removed. The project will result in additional revenue of $7 million per year and will incur additional costs (excluding depreciation) of $2.5 million per year. If this project is not undertaken then the area could have been leased out to another company for an annual rent of $ 750,000. The corporate tax rate is 30% and the required rate of return for projects of this risk level is 9%. Required: (a) Determine the cash flows associated with this project . (b) Compute the NPV and IRR for this project. ‘(c) Advise if you would recommend the project, with reasons.

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What are the key characteristics of the following market anomalies: (include a theoretical justification of each)

- Size

- Value

- Low Beta

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Long-term investment decision, payback method Personal Finance Problem Bill Williams has the opportunity to invest in project A that costs

$ 6 comma 600$6,600

today and promises to pay

$ 2 comma 200$2,200,

$ 2 comma 500$2,500,

$ 2 comma 500$2,500,

$ 2 comma 000$2,000

and

$ 1 comma 700$1,700

over the next 5 years. Or, Bill can invest

$ 6 comma 600$6,600

in project B that promises to pay

$ 1 comma 300$1,300,

$ 1 comma 300$1,300,

$ 1 comma 300$1,300,

$ 3 comma 400$3,400

and

$ 4 comma 100$4,100

over the next 5 years.

(Hint:

For mixed stream cash inflows, calculate cumulative cash inflows on a year-to-year basis until the initial investment is

recovered.)

a. How long will it take for Bill to recoup his initial investment in project A?

b. How long will it take for Bill to recoup his initial investment in project B?

c. Using the payback period, which project should Bill choose?

d. Do you see any problems with his choice?

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