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In the two-period model, suppose a household's income in the first period is $50,000, income in the second period is $60,000, and the real interest rate is 25 percent. Draw a diagram showing the budget constraint. Now, suppose the real interest rate declines to 20 percent. Draw the new budget constraint. For the budget constraints you have drawn, be sure to show the values of the intercepts on each axis. If the household decides that its consumption in period 1 should always be one half of the present value of income, determine whether the household is worse off or better off because of the decline in the real interest rate. Show your work.
Financial models have a variety of useful applications. Users of financial models must possess a firm grasp of the input risk and limitations of the model in order to use these tools apparently. Share a financial model with the class that you feel co..
Which of the following motives for holding cash concerns managers’ ability to take advantage of unexpected positive NPV investments when they arise? a) Transaction motive b) Precautionary motive c) Speculative motive d) Agency motive.
What type of risk was measured and accounted for in Parts b and and should this be of concern to the hospital's managers?
If the stock index is at 1,275.89 on the first payment date, calculate the net swap payment, indicating which party pays it.
A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in 15 years and has a current market price of $950. If the corporation sells more bonds it will incur flotation costs of $25 per bond. If the corporate tax rate is ..
The Outlet needs to raise $3.2 million for an expansion project. The firm wants to raise this money by selling zero coupon bonds with a par value of $1,000 that mature in 20 years. The market yield on similar bonds is 7.8%. How many bonds must the Ou..
LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/ art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8. The new chain w..
Birds of a Feather have 10-year bonds outstanding that carry an annual coupon of 8 percent. The bonds mature in 7 years and are currently priced at 110 percent of face value. What is the firm's pretax cost of debt?
Roy’s Toys, Inc. is currently an all-equity firm with 2 million shares of outstanding equity and stock price of $10 per share. Its unlevered cost of equity is 12%. The firm is contemplating a restructuring that would involve issuing $5 million in deb..
Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return for owning Serox in the most recent year? (Round to the nearest..
Stanovich Enterprises has 10-year, 12.0% semiannual coupon bonds outstanding. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issui..
Harry’s All American Lawn Care, Inc. has been public for 15 years, but just started paying dividends 5 years ago on their 50,000 shares of commons stock. Since that time, they have paid the following dividends: (1) $1.00, (2) $1.10, (3) $1.21, (4), $..
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