Determine the net effect of a reduction of taxation

Reference no: EM131259976

Q1. Average Mortgage Rates

Product	Rate	Change	Last week
30 yr fixed mtg	3.50%	+0.09	3.41%
15 yr fixed mtg	2.72%	+0.03	2.69%
30 yr fixed jumbo mtg	4.03%	-0.01	4.04%
30 yr fixed mtg refi	3.52%	+0.07	3.45%
Last update: 10/14/2016

The table above displays average mortgage interest rates for various products in the Chicagoland area. Use two principles of finance to explain differences between them.

Q2. (https://www..donaldjtrump.com/policies/tax-plan) The Trump Plan will collapse the current seven tax brackets to three brackets. The rates and breakpoints are as shown below. Low-income Americans will have an effective income tax rate of 0. The tax brackets are similar to those in the House GOP tax blueprint.

Brackets & Rates for Married-Joint filers:

Less than $75,000: 12%

More than $75,000 but less than $225,000: 25%

More than $225,000: 33%

Brackets for single filers are 4 of these amounts

The Donald Trump proposed tax plan would in effect reduce income tax rates across the board for all tax payers. Use the loanable funds model to determine the net effect of an overall reduction of taxes, T on:

a. Real interest rates, r,

b. Nominal interest rates, i,

c. Net foreign Investments, NFI

d. Net Exports, NX

e. Nominal exchange rates, E.

Please use diagrams along with an explanation to determine the net effect of a reduction of taxation on the variables above. Just stating "up" or "down", etc. will not work.

Q3. Six years from today you need $600,000. You plan to deposit $5000 monthly, with the first payment to be made now, into an account that pays 12 percent effective annual rate. Will you enough saved? Show the work to support your conclusion.

Q4. Tom plans to buy a Mazda 6 for $32,000 from a local automobile dealer in two years. He plans to place a down payment of $14,000 and borrow $18,000 from the dealer using a four-year loan, payable monthly at 8% APR. What will be Tom's quarterly payments on the down-payment loan? What will be the balance on the loan after he has made 10 monthly payments?

Q5. You plan to borrow $60,000 from the local bank. After doing your due diligence, your options boil down to two. You have the option of option A; a 5-yr loan, 10% annual percentage rate, compounded daily, payable at the end of 5 years, or B; a 5-yr, 10% annual percentage rate loan, compounded continuously, also payable after 5 years. If your goal is to minimize cost, holding everything else constant, which option would you choose? Explain your answer and show work.

Q6. From the table below, the yields on the 3-year, 1-year, and 2-year Treasury Bonds are 3.47%, 3.33%, and 2.69%, respectively. (10 pts) Use the model of rational expectations theory to determine the market's expectation of the 1 - year interest rate 2-years forward (from now)?

U.S. Treasury Bonds
Maturity	Yield	Yesterday	Last Week	Last Month
3 Month	2.39	2.40	2.35	2.22
1 Year	3.33	2.68	2.63	2.55
2 Year	2.69	3.30	3.28	3.21
3 Year	3.47	3.43	3.41	3.36

Q7. The following expectations have been made of a project. Compute the project's expected rate of return and standard deviation.

Economic State	Probability of state	Return
A	.13	-1.5%
B	.34	-2.5%
C	.53	35%

Q8. Sweet Tooth Cookies, Inc. has the following ratios.

ROE	10%
T/A turnover	1.5
Equity Multiplier	5

What is this firm's net profit margin?

Q9. Margo would like to create a portfolio of financial stocks. The goal is to maximize expected return and minimize risk (standard deviation of the portfolio's return). Should the stocks return in the portfolio highly correlated or negatively correlated? Explain your decision.

Q10. The expected return of security A is 20% and that of security B is 10%. Also, the standard deviation of security A is 4% and that the standard deviation of security B is 2%. The correlation coefficient between A and B is 0.0.

a. What is the expected return on the portfolio composed of 50% security A and 50% security B?

b. What is the standard deviation of the portfolio's return using the weights in part A (the measure of risk)?

c. Use the coefficient of variations to compare the expected risk and return of the portfolio in part a above with a portfolio that only consists of security B (100% of the portfolio's value in B and 0% in A). Given their return, which is a more risky investment? Why?

Q11. Southern Manufacturing Inc.'s financial statements are as follows:

Calculate free cash flows from operations.

Q12. The risk-free rate of return is 2.5% and a stock's beta coefficient is 2.1. If the market risk premium is expected is be 8.3%, what is the required rate of return of this tock? If the stock is expected to generate a 10% rate to its investors, should the stock be purchased?

Reference no: EM131259976

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