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A consultant commented that “too often the numbers look good but feel bad”. This comment often stems from an estimation error common to capital budgeting proposals that relate to future cash flows. Three reasons for this error often exist. First, reliability in predicting cash flows several years into the future is very difficult. Second, the present value of cash flows many years into the future (say, beyond 10 years) is often very small. Third, it is difficult for personal biases and expectations not to unduly influence present value computations. Discuss why these three areas are important to identify for estimation errors when you are considering an investment project.
The risk per unit of return is measured by the
The term structure of U. S. Treasury interest rates generally exhibits certain shapes during different stages of the business cycle. Discuss this relationship and explain why it holds, on average. What shape does the yield curve take prior to a reces..
Erika and Kitty, who are twins, just received $35,000 each for their 26th birthdays. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her "early retirement fund" on her birthday, beginning a year f..
KADS, Inc., has spent $420,000 on research to develop a new computer game. The firm is planning to spend $220,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $52..
Suppose you manage a stock portfolio with a beta of 1.3. There is no dividend yield and the risk-free rate is 3.4% per annum. In 4 months, the S&P500 index changes by 10%. Calculate the expected return of your portfolio in 4 months.
Suppose you are going to receive $14,200 per year for six years. The appropriate interest rate is 9.3 percent. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an ..
The investment bankers expect to exercise the option and purchase the 300,000 shares in exactly one year, when the stock price is fore-casted to be $4.50 per share. However, there is a chance that the stock price will actually be $10.00 per share ..
The IRS is revaluating the asset life categories used for ACRS depreciation. The trucks that JK Industries use are currently classified by the IRS as having an asset life of 7 years. Because these trucks actually last for 10 years, the firm’s manager..
Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will ea..
Jackson C (JC). is being acquired by Sampson Security (SS) for $61,676 worth of SS stock. The incremental value of the acquisition is $5,600. JC has 2,942 shares of stock outstanding at a price of $20 a share. SS has 3,441 shares of stock outstanding..
For the case showing in the following table calculate the future value of the single cash flow deposited today at the end of the deposit period of the interest is compounded annually at the rate specified. Single cash flow= 25000 Interest rate 15% De..
Explain how and why the euro's value could be expected to change against these currencies according to the PPP theory.
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