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A video game company uses three pieces of machinery to produce games. The company operates 365 days per year and the games produced each day can be sold at a profit of $10,000.
The three machines have a probability of failing on any given day of 1%, 2%, and 3% respectively. Thus the probability that they are all operational and the company is producing games on any day is approximately 94.11%.
The company is considering leasing a backup for each machine; the leases will cost $100,000 per year. Think of the backup machines in the same way we considered RAID disk drives; each pair of machines has a lower probability of failure than an individual machine. How much more profit will the company expect to earn if they have the backup equipment and will the additional profit cover the cost of the lease?
We have the following information for the company. The stock pays a $10 dividend, and it will grow by 100% the first year, 30% the second year and 3% forever after that. The unlevered beta is 1, D/E is 60/40 and the tax rate is .3. Additionally, we k..
One reason that the credit default swap market grew so rapidly from 2000 to 2007 is that:
Seven years ago, you cut costs for employee health insurance by switching from open-ended insurance to health maintenance organizations (HMOs). At that time, you kept open-ended insurance for retirees because your employees told you that retirees wan..
A firm is financed with twice as much debt as equity, incurs a 7% cost of debt, 16.5% cost of equity, and a 34% tax rate. What is the required return on assets?
Most of us intuitively understand that a dollar required today does not have the same value as a dollar needed (or utilized) in the future. This is due to several factors including interest rates, compounding factors, discounting factors and financia..
In response to the financial crisis of 2007, the Federal Reserve has maintained near-zero interest rates for the past several years. The Fed has kept rates low due to slow economic and employment growth during the past few years. Suppose the Fed rais..
Assume that the consolidated balance sheet for the commercial banking system can be simplified as follows: D+NW=R+L where D=deposits, NW= net worth, R=reserves and L=loans. Assume that the banks maintain a fixed reserves ratio (R/D) of 10% and a capi..
An investor earns dividends of $450 during the course of the year. At the end of the year, the stock is worth $10,700. The capital-gains yield on the stock was 8 percent. At the beginning of the year, the stock was worth?
You are interested in buying a stock that has a price of $72. You have projected that next year there is: a 10% probability the stock will equal $1, a 20% probability the stock will equal $44, a 30% probability the stock will equal $83, a 30% probabi..
Franchising is a win-win combination; both franchisees and franchisors are guaranteed success. The main reasons small businesses fail are poor management skills on the part of owners, inadequate capital, and poor planning.
Camilia plans to go for vacation to Australia in 11 years from now. She estimates that she will need 29,358 for the trip. How much does she need to place in a savings account today that earns 6.89% per year (compounded quarterly) to accumulate this a..
Suppose Raines Umbrella Corp. paid out $59,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what is the net new long-term debt?
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