Historically, big-firm stocks are riskier than bonds, True/False? Explain briefly.

Risk and return You are considering an investment in the stock market and have identified two potential stocks, they are Westpac Banking Corp. (ASX: WBC) and Singapore Airlines Ltd. (SGX: C6L). The historical prices for the past 10 years are shown in the table below.

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s).

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of WBC and C6L would provide good diversification? Explain your answer(s).

3. Calculate the expected (annual) return if you owned a portfolio consisting of 50% in WBC and 50% in C6L. Would you prefer the portfolio to owning either of the stocks alone?

Chandler Enterprises needs someone to supply it with 142,000 cartons of machine screws per year to support its manufacturing needs over the next five years. It will cost $1,820,000 to install the equipment necessary to start production; you’ll depreciate this cost straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for $152,000. Your fixed production costs will be $267,000 per year, and your variable production costs should be $9.60 per carton. You also need an initial investment in net working capital of $132,000. The tax rate is 22 percent and you require a return of 12 percent on your investment. Assume that the price per carton is $16.20.

a. Calculate the project NPV.

b. What is the minimum number of cartons per year that can be supplied and still guarantee a zero NPV? Verify that the quantity you calculated is enough to at least have a zero NPV.

c. What is the highest fixed costs that could be incurred and still guarantee a zero NPV? Verify that the fixed costs you calculated are enough to at least have a zero NPV.

A supervisor asks you to advise them on a project's value. The cost of capital is 8.4%

The NPV of the project is $____. Round to two decimal places

A company wants a $3 million loan for a warehouse expansion. The bank will finance 100% of the project with a 5 year balloon and a 20 year amortization. Give a loan structure for both a 5.00% and 5.25% fixed rate. (Specifically, I am looking for help concerning the 5 year balloon)

Please answer using Excel.

Question 2.2

Socks Ltd manufactures socks and legwarmers and wants to expand its product line. The management of the company has indicated that a new machine is required to manufacture a new line of brightly coloured socks. To purchase the machine, it has negotiated financing with a favourable before tax cost of 9% interest per annum with equal annual instalments. Alternatively, the company can enter into a direct financial lease with the manufacturer of the machine, which means that the manufacturer will offer the machine and maintenance on it for the useful life of the machine at a cost of R190 000 per year, paid at the start of each year for three years. The machine costs R400 000 and it is expected that it will require maintenance of R70 000 per year, if bought. It is also expected that the machine can be sold for R50 000 at the end of its useful life of three years. The machine can be depreciated by way of the straight-line method over a period of three years. A tax rate of 28% is applicable.

The company has a before tax cost of debt of 10%. Required: Determine the net advantage of leasing and indicate whether the company should lease or purchase in the given space.

1. Suppose that the annual interest rate is 5% in the U.S. and 8% in the U.K. The spot exchange rate is $1.80/£. Assume that the arbitrager can borrow up to $1,000,000 or £555,556. If the one-year forward rate is $1.72/£.

1. What is the no arbitrage one-year forward rate implied by Interest Rate Parity (IRP)?
2. What transactions will the arbitrager carry out? How much profit can the arbitrager make in terms of dollar?
3. Discuss how IRP will be restored in this case

Financial start of Red river ltd at the end of financial year 2018-2019 has the following information.

Sales of $855000, Cost of goods sold $542000, selling expenses of $12000, administration expenses of $6000, depreciation expenses of $35000, interest expenses of $12000 and corporate tax rate of 30%.

The firm is planning a new investment project that requires a cost of $350000. The firms plans a capital structure of 40% equity and 60% debt to finance this project.

1. Calculate the gross profit and operating profit (EBIT) of the company.
2. Identify tax payment and net profit of the company.
3. If the current Closing ordinary shares of the company is 50000 selling for $12 each, complete the PE ratio of the Red river.
4. Determine the dividend amount if any can be paid out to shareholders by applying the residual theory and Calculate the dividend payout ratio:

Case Study Neile looked at his mechanic and sighed. The mechanic had just pronounced a death sentence on his road-weary car. The car had served him well---at a cost of $500 it had lasted through four years of college with minimal repairs. Now, he desperately needs wheels. He has just graduated, and has a good job at a decent starting salary. He hopes to purchase his first new car. The car dealer seems very optimistic about his ability to afford the car payments, another first for him. The car Neile is considering is $35,000. The dealer has given him three payment options:

1. Zero percent financing. Make a $4000 down payment from his savings and finance the remainder with a 0% APR loan for 48 months. Neile has more than enough cash for the down payment, thanks to generous graduation gifs.

2. Rebate with no money down. Receive a $4000 rebate, which he would use for the down payment (and leave his savings intact), and finance the rest with a standard 48-month loan, with an 8% APR. He likes this option, as he could think of many other uses for the $4000.

3. Pay cash. Get the $4000 rebate and pay the rest with cash. While Neile doesn’t have $35,000, he wants to evaluate this option. His parents always paid cash when they bought a family car; Neile wonders if this really was a good idea.

Neile’s fellow graduate, Henna, was lucky. Her parents gave her a car for graduation. Okay, it was a little Hyundai, and definitely not her dream car, but it was serviceable, and Henna didn’t have to worry about buying a new car. In fact, she has been trying to decide how much of her new salary she could save. Neile knows that with a hefty car payment, saving for retirement would be very low on his priority list. Henna believes she could easily set aside $3000 of her $45,000 salary. She is considering putting her savings in a stock fund. She just turned 22 and has a long way to go until retirement at age 65, and she considers this risk level reasonable. The fund she is looking at has earned an average of 9% over the past 15 years and could be expected to continue earning this amount, on average. While she has no current retirement savings, five years ago Henna’s grandparents gave her a new 30-year U.S. Treasury bond with a $10,000 face value. Henna wants to know her retirement income if she both (1) sells her Treasury bond at its current market value and invests the proceeds in the stock fund and (2) saves an additional $3000 at the end of each year in the stock fund from now until she turns 65. Once she retires, Henna wants those savings to last for 25 years until she is 90. Both Neile and Henna need to determine their best option.  

Required Q.1: What are the cash flows associated with each of Neile’s three care financing options?

Q.2: Suppose that, similar to his parents, Neile had plenty of cash in the bank so that he could easily afford to pay cash for the car without running into deb now or in the foreseeable future. If his cash earns interest at a 5.4% APR (based on monthly compounding) at the bank, what would be his best purchase option for the car?

Q.3: Suppose Henna’s Treasury bond has a coupon interest rate of 6.5%, paid semiannually, while current Treasury bonds with the same maturity date have a yield to maturity of 5.4435% (expressed as an APR with semiannual compounding). If she has just received the bond’s 10th coupon, for how much can Henna sell her treasury bond?

Q.4: Suppose Henna sells the bond, reinvests the proceeds, and then saves as she planned. If, indeed, Henna earns a 9% annual return on her savings, how much could she withdraw each year in retirement? (Assume she begins withdrawing the money from the account in equal amounts at the end of each year once her retirement begins.)

Q.5: Henna expects her salary to grow regularly. While there are no guarantees, she believes an increase of 4% a year is reasonable. She plans to save $3000 the first year, and then increase the amount she saves by 4% each year as her salary grows. Unfortunately, prices will also grow due to inflation. Suppose Henna assumes there will be 3% inflation every year. In retirement, she will need to increase her withdrawals each year to keep up with inflation. In this case, how much can she withdraw at the end of the first year of her retirement? What amount does this correspond to in today’s dollars? (Hint: Build a spreadsheet in which you track the amount in her retirement account each year) Q.6: Should Henna sell her Treasury bond and invest the proceeds in the stock fund? Give at least one reason for and against this plan.

Q1: what we mean by social responsibility practices and its impact on competitive advantage of the company

HJK savings has purchased a corporate bond at a price of K98.71. The bond has a coupon rate of 6% and pays coupon interest annually. The bond has a par value of K100.00 and is redeemable at this par value in five years time. it is expected that the required rate of return on these bonds will 5% in two years time

a) Assuming that HJK ltd will sell this bond in two years time, calculate what the sale price would be.

b) Assuming that HJK savings Ltd will sell this bond in two years time, calculate the annualised yield on the bond over the next two years

c) Assuming that the required in two years time of 5% was overstated

i) how would the actual selling price differ from the forecast price calculated above

ii) How would the actual annualised yield over the next two years differ from the forecasted yield.

Ture or False：

a. All FED-regulated banks operating in the US have to go through an annual CCAR stress testing
b. If a bank receive a conditional-PASS on a CCAR submission it can not pay an annual dividend to shareholders neither be allowed to buy-back its stock
c. The Federal Reserve sets the borrowing rates of the US Treasury
d. The US Congress supervises the Federal Reserve
e. The SEC has broad authorities to monitor securities and other market activities by registered broker-dealers and registered hedge funds.
f. The SEC was the primary regulator of Lehman Brothers, Bear Stearns, Merrill Lynch in 2007
g. The FED has no role to play in trade disputes between the US and other countries
h. Risk Weighted classification of assets and counterparties allows for a more accurate mapping of the risk of default vs the Notional Amount classification