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1. If expected inflation is 3% and the nominal interest rate is 6%, what is the real rate of interest? If actual inflation turns out to be only 2%, explain who benefits and who loses.
2. The economy is suffering from a recession, explain what will happen to the yield spread between a Treasury bond and a BBB rated corporate bond.
3. What is the difference between preferred and common stock? If you want higher expected returns, which would you purchase? Which is riskier; why?
4. All else equal, which would offer a higher interest rate: a seven-year Treasury note or a fifteen-year Treasury bond? Explain.
5. Assume that the city of Chicago issues both general obligation and revenue municipal bonds. Do the bonds have equal risk? Why or why not?
6. Two securities of equal risk are available for investment—a money market security and a capital market security. Assuming a normal yield curve, which security should be purchased to achieve the highest yield? Why?
You have $128,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 19.8 percent. Stock X has an expected return of 18 percent and a beta of 1.20, and Stock Y has an expected re..
The current price of a non-dividend paying stock is $50. Use a two-step tree to value a European call option on the stock with a strike price of $48 that expires in 6 months. Each step is 3 months, the risk free rate is 5% per annum, and the volatili..
Franklin Country Foundry has a total asset turnover rate of 1.10 and their profit margin is 9.40 percent. There are 102,546 in accounts receivable and assets total 1,230,526. How long on average does it take the firm to collect its receivables?
A project is expected to produce cash flows of $5,000, $8,000, and $16,000 over the next three years, respectively. After three years, the project will be discontinued. What is this project worth today at a discount rate of 15 percent?
You want to use a building your company owns to develop a new investment opportunity. You have checked with property management in your company, and have consulted a few commercial brokers. What best describes how this should be treated in your prepa..
Your company is investigating the opportunity to produce MP3 players. The equipment required for the project initially costs $1,800,000 and will be depreciated on a straight line to $400,000 (not to zero) over the 4 year life of the project. What is ..
Magic Flutes has total receivables of $3,600, which represent 20 days’ sales. Total assets are $78,000. The firm’s operating profit margin is 5.30%. Find the firm’s sales-to-assets ratio and return on assets.
In downtown Dover Massachusetts there is a small retail establishment called the Dover Pharmacy. It is for sale to new owners. It sells beverages and food for breakfast and lunch. Is the cost of $50,000 today a fair price for this current business if..
AMP, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $ 427386, $512,178, $562755, $764,997, $816,50..
Which of the following securities has a pre-arranged buyback agreement? Suppose that your firm currently has an accounts receivable from an international customer that is incorporated in a country with a very stable government. Which risk does this ..
Immediately after a hurricane, it is likely that the quantity demanded for tree cutting/removal services will ______ the quantity supplied, causing the price of tree cutting/removal services to ______. The question of who pays the greater amount of a..
Which critical path activity would be the most logical choice for the second activity to crash?
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