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DEFAULT RISK PREMIUM: A company’s 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.75%. The average inflation premium is 2.05%, and the maturity risk premium is estimated to be 0.1 x (t -1) %, where t = number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds?
You are evaluating a project that costs $840,000, has seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $40, vari..
Twice Shy Industries has a debt−equity ratio of 1.2. Its WACC is 9 percent, and its cost of debt is 5.7 percent. The corporate tax rate is 35 percent. What is the company’s cost of equity capital? What is the company’s unlevered cost of equity capita..
Compute the PI statistic for Project Q if the appropriate cost of capital is 11 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project Q Time: 0 1 2 3 4 Cash flow –$11,400 $3,550 $4,380 $1,720 $2,35..
The operating cost of a new machine is $500 for the first year. Starting the second year, the operating cost increases by $200 per year for the next 10 years. Calculate the equivalent annual operating cost of the machine. What will be the present and..
As the company accountant is currently on holiday you are required, by calculating net present value, internal rate of return and payback, to advise the company which option they should take. Calculate the approximate equivalent annual percentage cos..
Looking at a list of beta coefficients you spot a number of stocks as possible buys for your new stock portfolio. You have $80,000 to invest. You have decided to have just three stocks in your portfolio. Make your third selection and calculate the be..
Nancy Cotton bought 400 shares of NeTalk for $15 per share. One year later, Nancy sold the stock for $20 per share, just after she received a $0.50 cash dividend from the company. What is the total dollar return earned by Nancy for the year? What is ..
If the bank's quoted interest rate is 6% per annum and coffee prices increased at a 3% annual rate of inflation, what would an endless, inheritable free subscription to one Starbucks coffee per day be worth today
A stock has a beta of 1.12, the expected return on the market is 10 percent, and the risk-free rate is 3.0 percent. What must the expected return on this stock be?
A newly issued 10-year maturity, 6% coupon bond making annual coupon payments is sold to the public at a price of $820. The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond. Calculate the constant y..
A digital (k, t) call option gives its holder 1 at expiration time t if s(t)>=k or 0 if s(t) =k. Let C1 be the cost of the call. Let C2 be the cost of the put. Derive the put-call parity formula.
Wilcox Corporation had income from continuing operations of $750,000 (after taxes) in 2014. In addition, the following information, which has not been considered, is as follows. In 2014, Wilcox experienced an uninsured earthquake loss in the amount o..
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