A real estate investor has bought an office building valued at $100 million. After a 10% down payment for the property price, the investor has borrowed a one-year mortgage loan at 10% interest rate from Nopay Bank to finance the remaining purchase price. The credit rating of the investor is ABB indicating that his probability of default is 3%. The current market value of the office building is $100 million. The office building is pledged with Nopay Bank as collateral. The market value of the office building at th end of one year is expected to be either up 30% or down 30%. The risk-free rate of interest to Nopay Bank is 4%.

Questions

a) Describe the payoffs to the real estate investor.

b) Describe the payoffs to the bank.

c) If Nopay Bank requires the investor to buy default insurance, how much would the insurance

cost?

d) What is the default insurance cost if the down payment is 20% instead?

e) What is the default insurance cost if the volatility of the office price is expected to be 50% instead?

Assume Australia is a small nation and thus unable to influence world price. Its demand and supply schedules for TV sets are shown in the following table.

To protect its producers from foreign competition suppose the Australian government levies a specific tariff of $100 on imported TV sets.

a) Determine and show graphically the effects of the tariff on the price of TV sets in Australia, the quantity of TV sets produced by Australian producers, the quantity of TV sets purchased by Australian consumers, and the volume of imports

b) Calculate the reduction in Australian consumer surplus and increase in Australian producer surplus because of the tariff.

c) What is the amount of deadweight loss in the Australian economy because of the tariff? Please explain and type out work, hard for me to read hand written. thank you!

Now, assume that the demand in the fish market is given by: Demand: Quantity = 10, 100 − 100 ∙ Price 5. Find the equilibrium price and quantity, and represent the demand, supply, and equilibrium in a graph (with quantity in the horizontal axis and price in the vertical axis). 6. How much money is each firm making in profit? 7. If there is free entry to the fish market, how many firms will there be in equilibrium in the long run? Finally, imagine that the government sets a tax of $10 per unit on sellers. 8. Compute the equilibrium after tax and the tax revenue. 9. How much surplus do consumers lose due to the tax? And how much do sellers lose in aggregate profit? 10. The government decides to use the tax revenue to fully compensate consumers for their loss in consumer surplus due to the tax, and to use what- ever amount of money is left to partially compensate the sellers for their loss in profit. By how much money does the compensation fall short of the sellers’ loss?

Cost = 400 + Output + Output²

Cotton On Ltd. currently has the following capital structure:

Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual

before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years.

Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely.

Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%

The firm's marginal tax rate is 30%.

Required:
a) Calculate the current price of the corporate bond?
b)Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?

c) Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%

Cotton On Ltd. currently has the following capital structure: Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%.

Required:

a) Calculate the current price of the corporate bond?

b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%?

c) Calculate the current price of the preferred share if the average return of the shares in the same industry is 10%

                     Earnings Per Share Example

Consider the following information for Wichtel Corporation. Assume that the weighted average shares were 500,000 shares.

Preferred Stock:

5%, $100 par convertible cumulative preferred stock issued at par, convertible into 20,000 shares of common               stock $200,000

6%, $100 non convertible cumulative preferred stock issued at $102;   $300,000

Stock options                          50,000 shares                      

Option Exercise Price             $20 per share

Average market price              $31

Year-end market price             $28

Bonds:

8%, $1,000 par, issued at par, convertible into 16,000 shares of common stock                   $200,000

9%, $1,000 par, issued at par, convertible into 7,000 shares of common stock $100,000.

Net income for year is $400,000. The company's tax rate is 35%. No actual conversions occurred, and no options were exercised during the year.

Required:

1. Compute basic earnings per share

Basic EPS = ______________________________________________

2. Compute diluted earnings per share

Diluted EPS = _________________________________________________

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate and the yield are given below. Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale.

Stated Coupon Rate= 4.5% Market Yield Rate= 4%

a.) Calculate the price and prepare the amortization table the $100 million bonds issued by Houston Co.

b.) Prepare the journal entry at issuance for Houston Co.

c.) Prepare the two interest expense entries for 2017 for Houston Co.

d.) Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

e.) Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

f.) Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

g.) Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.

Houston Co. issues $100 million in bonds on January 1, 2017 to expire in 6 years. Interest is paid semi-annually on June 30 and December 31. The coupon (stated) rate and the yield are given below.    Dallas Inc. purchased $1 million of the bonds (face value). Dallas Inc. classifies the bonds as available for sale

Coupon rate= 6.5% Yield=6%

A)Calculate the price and prepare the amortization table the $100 million bonds issued by Houston Co.

B)Prepare the journal entry at issuance for Houston Co.

C)Prepare the two interest expense entries for 2017 for Houston Co.

D)Prepare the amortization table for the $1 million bonds purchased by Dallas Inc.

E)Prepare the journal entry for purchase of the bonds by Dallas Inc. at the issue price.

F)Prepare the two journal entries for the receipt of interest revenue by Dallas Inc.

G)Assuming that the market price of the bonds is 101 on December 31, 2017, prepare the necessary journal for Dallas Inc.