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1. Explain why the capital expenditure build-up in the unconventional oil and gas sector was heavily financed by debt.
2. A firm issues a single level coupon bond with a face value of $1,000 and a coupon rate of 15%. Coupon payments are made annually. The firm's EBITDA is $750 per year. Calculate the interest coverage ratio for this firm.
3. A power plant that produces emissions of sulfur dioxide (SO2). Annual emissions are 1,000 tons per year in perpetuity and it currently faces an emissions tax of $20 per ton of SO2. The power plant can install a scrubber with a capital cost of $50,000. If it uses the scrubber, it incurs a one-time cost of $250,000 and the plant will not emit any SO2 for the remainder of its operational life. The plant faces a discount rate of 10%. There is no marginal cost to using the scrubber. We can thus view the scrubber as an option to control SO2 emissions in the future.
4. Should the power plant install the scrubber and commit to using it?
5. There is a 50% probability that the emissions price will increase to $35 per ton next year. Calculate the value of the option to control SO2 pollution. Should the power plant install the scrubber?
Sensitivity Analysis and Break-Even Point We are evaluating a project that costs $836,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. What is the sensitivity of OC..
New stock can be sold to the public at the current price, but a flotation cost of 10% would be incurred. What would be the cost of new equity?
Fairfax Paint just borrowed 66,800 dollars. The terms of the loan require the company to make equal semi-annual payments forever. The first semi-annual payment is due in 6 months. If the regular semi-annual loan payment is 4,800 dollars, then what is..
Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, rd = 7%, rps = 7.9%, and rs = 14%. If Shi has a target capital structure of 30% debt, 5% preferre..
You are an arbitrageur in London. Swiss francs are currently selling in London for U.S. $0.67. You anticipate they will be selling for U.S. $0.70 in 30 days. You purchase $1 million worth of francs on the spot market. In a 2-3 page paper examine what..
A 10-year bond pays interest of $27.70 semiannually, What are its annual coupon rate and yield to maturity?
Find the duration of a 7% coupon bond making annual coupon payments. What is the duration if the yield to maturity is 11.6%?
A machine shop owner wishes to monitor the diameter of an engine boring operation where the piston bore should be 4.25”. He obtains 8 samples of 5 and records the following data. Calculate the control limits for X bar and R charts, plot the charts an..
A firm is considering an investment in a new machine with a price of $18 million to replace its existing machine. The current machine has a book value of $6 million and a market value of $4.5 million. Assume the company uses straight-line depreciatio..
JJ Industries will pay a regular dividend of $3.1 per share for each of the next four years. At the end of the four years, the company will also pay out a $81 per share liquidating dividend, and the company will cease operations. If the discount rate..
Crisp Cookware's common stock is expected to pay a dividend of $1.75 a share at the end of this year (D1 = $1.75); its beta is 0.75; the risk-free rate is 4.4%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate..
For 2016, Ernst and Emily have properly determined that their taxable income is $69,800, including $6,000 of unrecaptured § 1250 gain and $3,500 of 0%/15%/20% gain. They file a joint tax return. Are both the $6,000 unrecaptured § 1250 gain and $3,500..
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