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Case Study: Mortgage Application Principal: $500,000 Assume that the loan is an 'interest-only' loan. Option 1: Variable Rate a) The current rate of the loan (fixed for 2 years): 4.12% b) The interest rate is unknown after Year 2. c) The duration of the loan is 7 Years. Option 2: Fixed Rate a) Refinance the current loan and pay pre-payment penalty of (add into the cost of the loan) $25,000 b) Lock-in a fixed rate of interest of 4.00% for the 7-Year Term Option 3: Interest Rate Swap a) Lock-in a fixed interest rate of 3.5%. b) Pay an upfront cost of swap (add into the cost of the loan) of 3.00%. c) Pay the pre-payment penalty of $25,000 (add into the cost of the loan). d) The term of the loan is 7 years. Deliverable: Draft a memo to your client outlining your decision-making process. Pay particular attention to the uncertainty created by the variable rate of interest included in Option 1.This memo should provide insight into your analysis and help your client reason through their impending decision. Your memo also needs to convey your understanding of the problem and the solution.
Explain the following project evaluation processes: NPV, Payback, AAR, IRR. Is any one evaluation process better the others? Why?
What will be the current yield and the capital gains yield for each bond for each of the next 5 years?
The expected EBIT after the new financing is $7 million, with a standard deviation of $3 million. Which method of financing will maximize its EPS? What is the probability that you have made the right choice?
A financial advisor tells you that you can make your child a millionaire if you just start saving early. You decide to put an equal amount every year into an investment account that earns 8 percent interest per year, beginning on the day your child i..
Chow Corporation is an insurance company in Hong Kong. Chow hires fifty-five people to process insurance claims. The volume of claims is extremely high and all claims examiners are kept extremely busy.
What are sunk costs? Should they be included in the cash flow estimation when making a capital budgeting decision? Why or why not?
Assume the expected inflation rate to be 4 percent. If the current real rate of interest is 6 percent, what ought the nominal rate of interest be?
Newman Medical Center is considering purchasing an ultrasound machine for $1,150,000. The machine has a 10-year life and an estimated salvage value of $30,000.
Stone Sour Corp. issued 15-year bonds 2 years ago at a coupon rate of 7.90 percent. The bonds make semiannual payments. If these bonds currently sell for 109 percent of par value, what is the YTM?
Option b: a new machine that would yield a 15% return but would cost 17% to finance through common equity.
Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places.
Ron's Pharmacy has collected $600 in sales taxes during the March. If sales taxes must be remitted to state government monthly, what entry will Ron's Pharmacy create to demonstrate the March remittance?
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