Joi Chatman recently received her finance degree and has decided to enter the mortgage broker

business. Rather than working for someone else, she will open her own shop. Her cousin Mike

has approached her about a mortgage for a house he is building. The house will be completed in

three months, and he will need the mortgage at that time. Mike wants a 25-year, fixed-rate

mortgage in the amount of $400,000 with monthly payments.

Joi has agreed to lend Mike the money in three months at the current market rate of 6 percent.

Because Joi is just starting out, she does not have $400,000 available for the loan; she

approaches Ian Turnbell, the president of IT Insurance Corporation, about purchasing the

mortgage from her in three months.

Ian has agreed to purchase the mortgage in three months, but he is unwilling to set a price on the

mort-gage. Instead, he has agreed in writing to purchase the mortgage at the market rate in three

months. There are Treasury bond futures contracts available for delivery in three months. A

Treasury bond contract is for $100,000 in face value of Treasury bonds.

1. What is the monthly mortgage payment on Mike’s mortgage?

2. What is the most significant risk Joi faces in this deal?

3. Treasury bond prices have a __________ relationship with interest rates.

a. positive

b. negative

4. As interest rates rise, Treasury bonds become _________.

a. less valuable

b. more valuable

5. Since Joi will _____ when interest rates rise.

a. loss money

b. gain money

6.

In order to protect Joi from decreases in the price of Treasury bonds, she

should take a _____ position in Treasury bond futures to hedge the risk.

a.

Long

b.

Short

7. Suppose that in the next three months the market rate of interest falls to 5 percent. a.

How much will Ian be willing to pay for the mortgage?

Suppose that an investor has 8-year investment horizon. The investor is
considering a 15-year semi-annual coupon bond selling at $990 (par value is
$1000) and having a coupon rate of 4%. The investor expectations are as follows:
• The first 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4%,
• the first 8 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at an annual interest rate of 4.25%,
• the last 4 semi-annual coupon payments can be reinvested from the time of
receipt to the end of the investment horizon at a 3.75% annual interest rate, and
• the required market interest/discount rate on 7-year bonds at the end of the
investment horizon is 3.6%.
A) What is the YTM of the bond?
B) What is the total return on bond equivalent basis from investing in the
bond?
C) Please explain your result carefully.

Advance Engineering is considering opening a new location with an initial cost of $398,0000. This location is expected to generate cash flows of $117,000, $121,000, $126,000, $133,000, and $142,000 in Years 1 to 5. What is the payback period?

Lowell Flooring has assigned a discount rate of 15.2 percent to a new project that has an initial cost of $285,400 and cash flows of $87,400, $98,300, and $131,700 for Years 1 to 3, respectively. What is the net present value of this project?

Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $65,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,400 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.

Assume the firm has a tax rate of 21 percent.

  

c-1.	Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-2.	Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-3.	Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-4.	Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Suppose you have 25 years until you retire, and that you desire a retirement nest-egg of $2,500,000 on the day you retire. Suppose also that you’ve saved $100,000 toward your retirement so far, and that your investment account earns a nominal rate of 7.5% per year, compounded monthly. In addition, suppose you expect a windfall inheritance of $200,000 five years from now that you will invest in this account.

a) What is the effective interest rate, or annual percentage yield, of your investment account?

b) How much money should you deposit into that account every year in order to reach your goal?

Two years ago the Krusty Krab Restaurant purchased a grill for $50,000. The owner, Eugene Krabs, has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill. This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years, after which it would have no salvage value. Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year. The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value. All other operating expenses are identical for both grills. The existing grill can be sold to another restaurant now for $30,000.

The Krusty Krab's tax rate is 35%. he incremental cash flow that the Krusty Krab will incur today (Year 0) if they elect to upgrade to the new grill is closest to:

The incremental cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to:

Suppose a​ ten-year, $1,000 bond with an 8.8% coupon rate and semiannual coupons is trading for $1,035.28.

a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)?

b. If the​ bond's yield to maturity changes to 9.4% APR, what will be the​ bond's price?

a. What is the​ bond's yield to maturity​ (expressed as an APR with semiannual​ compounding)?

The​ bond's yield to maturity is blank%. (Round to two decimal​ places.)b. If the​ bond's yield to maturity changes to 9.4%​APR, what will be the​ bond's price?The new price for the bond is $blank. (Round to the nearest​ cent.)

Please show all work in steps with explanation. thanks.

One year​ ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many​advantages; you can purchase it for $140,000 today. It will be depreciated on a​ straight-line basis over ten​ years, after which it has no salvage value. You expect that the new machine will contribute EBITDA​ (earnings before​ interest, taxes,​ depreciation, and​ amortization) of $55,000 per year for the next ten years. The current machine is expected to produce EBITDA of $22,000 per year. The current machine is being depreciated on a​ straight-line basis over a useful life of 11​ years, after which it will have no salvage​ value, so depreciation expense for the current machine is $10,000 per year. All other expenses of the two machines are identical. The market value today of the current machine is $50,000. Your​ company's tax rate is 38%​, and the opportunity cost of capital for this type of equipment is 11%. Is it profitable to replace the​ year-old machine?

The NPV of the replacement is ​$_________ (Round to the nearest​ dollar.)

1. Explain four of the basic principles of lending.

2. List twelve elements that should be included in a banks credit policy.

1. consider the use of mergers verses corporate alliances in growing a company.
2. 1. Discuss the differences between a merger and a corporate alliance.
   1. In 5 sentences. Explain the pros and cons of both and how taxes influence the use of each approach.

1. Explain 3 methods which can be used for portfolio selection and structuring

2. List and explain 4 concentration management techniques.

Mid States 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 $188 million in a boom year and $79 million in a recession. The company's required debt payment at the end of the year is $113 million. The market value of the company’s outstanding debt is $86 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. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)

Payoff           $  

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

Promised return             %

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

Expected return             %

Assume Corbins ,Inc purchased an automated machine 5 years ago that had an estimated economic life of 10 years. The Automated Machines originally cost $300,000 and has been fully depreciated, leaving a current book value of $0. The actual market value of this drill press is $80,000. The company is considering replacing the automated machine with a new one costing $380,000. Shipping and installation charges will add an additional $10,000 to the cost. Corbins., Inc also has paid a sunk cost $25,000. The new machine would be depreciated to zero on a straight-line basis. The new machine is expected to have a 5-year economic life, and its actual salvage value at the end of the 5-year period is estimated to be $50,000. Corbin’s current marginal tax rate is 40 percent. Corbins., Inc expects annual revenues during the project’s first year to increase from $140,000 to $170,000 if the new drill press is purchased. After the first year, revenues from the new project are expected to increase a rate of $4,000 a year for the remainder of the project life. Assume further that while the old automated machine required two operators, the new drill press is more automated and needs only one, thereby reducing annual operating costs from $80,000 to $40,000 during the project’s first year. After the first year, annual operating costs of the new drill press are expected to increase by $2,000 a year over the remaining life of the project. The old automated machine is fully depreciated, whereas the new machine will be depreciated on the straight-line basis. The marginal Tax rate of 40 percent applies. Assume also that the company’s net working capital does change as a result of replacing the automated machine will increase by $10,000 per year over the life of the project. Should Corbins, Inc. accepts the project? Justify your answer based on your computation for NPV (using 10 percent-required return) and IRR.

*** make sure the answer isn't the same one that has. been answered under the same questions as they're all wrong.

Edwards Construction currently has debt outstanding with a market value of $450,000 and a cost of 8 percent. The company has an EBIT of $36,000 that is expected to continue in perpetuity. Assume there are no taxes.

a. What is the value of the company’s equity and the debt-to-value ratio? (Do not round intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. Round your debt-to-value answer to 3 decimal places, e.g., 32.161.)
  

Equity value	$
Debt-to-value

b. What is the equity value and the debt-to-value ratio if the company's growth rate is 3 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g., 32.16, and round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

Equity value	$
Debt-to-value

c. What is the equity value and the debt-to-value ratio if the company's growth rate is 5 percent? (Do not round intermediate calculations. Round your equity value to 2 decimal places, e.g., 32.16, and round your debt-to-value answer to 3 decimal places, e.g., 32.161.)

Equity value	$
Debt-to-value