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(Risky Business) Suppose we are considering investing in a Venezuelan bond. The Venezuelans have just cast off Chavismo, but 17 years of rule by Ch´avez has left the country in tatters: inflation and crime are high and debt owed is more than the reserves held. Furthermore, the country’s main wealth (oil) has fallen greatly in value. Because of this, Venezuelan government bonds are trading at very high yields. If Venezuela is able to pay their debts, a bond will pay off $1000 in one year; if not, creditors will only get a partial recovery: a bond will pay off, say, $500.
a. If the bond is a zero-coupon bond and the probability of a default is 1/2 — and a “riskfree” zero-coupon bond is yielding 10% — what is the present value of the Venezuelan bond?
b. What is the yield of the Venezuelan bond?
c. Now suppose we can invest in a risky perpetuity. Each year we flip a coin. If the coin comes up heads, we get $15; otherwise, we get $30. What is the value of this perpetuity if we can invest in risk-free zero-coupon bonds yielding 10% annualized?
The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $300,000. What is the book value of the equipment?
Prepare an amortization schedule for a three-year loan of $111,000. The interest rate is 10 percent per year, and the loan calls for equal annual payments. How much total interest is paid over the life of the loan?
The effective annual yield on a one-year zero coupon bond is 7% and the effective annual interest rate on a two-year zero coupon bond is 8%. You are able to arrange a one-year forward investment at rate i for a one-year period.
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Pierce Furnishings generated $2 million in sales during 2012, and its year-end total assets were $1.4 million. Also, at year-end 2012, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,..
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Jiminy's Cricket Farm issued a 30-year, 10.4 percent semiannual bond 9 years ago. The bond currently sells for 85.5 percent of its face value. The company’s tax rate is 30 percent. What is the pretax cost of debt? What is the aftertax cost of debt?
Can any ratio or combination of ratios predict a company's long-term viability? Can you think of an example whereby one ratio incorrectly looks "good" only because another ratio is "bad"?
The last dividend paid by Florida Gator Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a constant rate of 6% forever. If the firm’s required return (Rs) is 11%, wh..
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