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Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $170,000. The project will produce 850 cases of mineral water per year indefinitely. The current sales price is $142 per case, and the current cost per case is $106. The firm is taxed at a rate of 36%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 12%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.
What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)
An investment today of $26,000 promises to return $10,000 annually for the next 3 years. What is the approximate real rate of return on this investment if inflation averages 5% annually during the period?
A $500,000 loan requires monthly payments for 20 years. The annual interest rate on the loan is 3%. Immediately after the loan has been finalized, the price of loans of equivalent risk and maturity increases by 50 basis points (3.0% to 3.5%). How muc..
You own a portfolio that has $2,100 invested in Stock A and $3,350 invested in Stock B. If the expected returns on these stocks are 11 percent and 17 percent, respectively, what is the expected return on the portfolio?
A bond with 20 years until maturity has a coupon rate of 7.4 percent and a yield to maturity of 7.5 percent. What is the price of the bond?
When used as evidence, what does an effective example do? It makes abstractions less didactic. It makes concrete ideas more figurative. It makes concrete ideas more abstract
What is the underlying principle that supports depreciating long-term assets over their useful lives instead of just expensing them when purchased? We want full disclosure of large cash expenditures.
Tropicali’s overall average cost of capital is 10%. Its frozen foods division is riskier than the firm as a whole, its fresh produce division has risk similar to the firm’s, and its institutional foods division has less risk. Tropicali adjusts for bo..
The payback period is not concerned with
Why is the N.P.V. considered to be theoretically superior to all other capital budgeting techniques? Reconcile this reasoning with the prevalence in practice of using the I.R.R. How would you respond to your C.F.O. if she instructed you to use the I...
Assume the risk-free rate is 4% and the market risk premium is 6%. What would be the required rate of return for Wal-Mart?. Here for Wal-Mart, a beta of 0.82 will move up or down more slowly, even when the rest of the stock market is making a bold mo..
You are planning to save for retirement over the next 35 years. To do this, you will invest $840 a month in a stock account and $440 a month in a bond account. The return of the stock account is expected to be 10.4 percent, and the bond account will ..
Mortgage is categorized as loan between home buyers (borowers) and lenders (banks) directly. Does your categorization of lending decision change when you consider the mortgage that is sold off to investors?
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