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Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $1.7 million per year to beneficiaries. The yield to maturity on all bonds is 18.0%.
a. If the duration of 5-year maturity bonds with coupon rates of 8.0% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon rates of 3% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation?
b. What will be the par value of your holdings in the 20-year coupon bond?
Leverage magnifies losses associated with declines in asset values but not with gains in asset values. This asymmetry is why bank regulators have outlawed leverage by banks that benefit from FDIC insurance.
The best measure to use for measuring the risk of a random variable would be:
How is a business’s cost of debt estimated? Its cost of equality? Explain the calculation and interpretation of the corporate cost of capital.
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The Sisyphean Company's common stock is currently trading at $26.75 per share. The stock is expected to pay a $2.8 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 12%. If the dividend payout rate is expected to r..
What is projected free cash flow to equity for the coming year?
Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the go..
Identify the factors that influence equity pricing. How would you value a stock of a startup company expected to grow dividends rapidly during the years 1-5 before its dividend growth stabilizes?
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