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Your company needs to borrow $100,000 to purchase equipment. The equipment will pay for itself in 1 year and the company is considering the following alternatives for financing its purchase:
a. Alternative A: The firm’s bank has agreed to lend $100,000 at a rate of 14%. Interest would be discounted, and a 15% compensating balance would be required. However, the compensating-balance requirement would not be binding on the company because the company normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank.
b. Alternative B: The equipment dealer has agreed to finance the equipment with a 1 year loan. The $100,000 loan would require payment of principal and interest totaling $116,300.
Which alternative should your company choose? If the bank’s compensating-balance requirement were to necessitate idle demand deposits equal to 15% of the loan, what effect would this have on the cost of the bank loan alternative?
It is April and a trader buys 100 September put options with a strike price of $20. The stock price is $17.37 and the option price is $5.21. At the expiration, the stock price becomes $18.89. Calculate the option profit to the trader.
Suppose you know the following regarding a company’s financials: Total Debt? Total Equity? Total Assets?
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You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 16 percent, –16 percent, 18 percent, 28 percent, and 10 percent. a. What was the arithmetic average return on Crash-n-Burn’s stock over this five-year pe..
Your firm is considering leasing a new robotic milling control system. The lease lasts for 4 years. The lease calls for 5 payments of $280,000 per year with the first payment occurring at lease inception. The firm can borrow at 10%, and the corporate..
All equity business has 100 million shares outstanding selling for $20 a share. Management believes interest rates are unreasonably low and decides to execute a leverages recapitalization. It will raise $1 billion in debt and repurchase 50 million sh..
In 1867, the United States bought the Alaska territory from Russia at the urging of Secretary of State William H. Seward. The Russian government needed cash and feared the territory might eventually be lost due to conflict or encroachment. In hindsig..
Carry-ALL plans to sell 1,300 carriers next year and has budgeted sales of $46,000 and profits of $22,000. Variable costs are projected to be $20 per unit. Michael Co. offers to pay $24,500 to buy 570 units from Carry-ALL.
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