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The First National Bank has been losing money on automobile consumer loans and is considering the implementation of a new loan procedure that requires a credit check on loan applicants. Experience indicates that 82% of the loans were paid off, whereas the remainder defaulted. However, if the credit check is run, the probabilities can be revised as follows:
An estimated 80% of the loan applicants receive a favorable credit check.
Assume that the bank earns 18% on successful loans, loses 100% on defaulted loans, suffers an opportunity cost of 18% when the loan is not granted but would have been successful, and an opportunity cost of 0% when the loan is not granted and would have defaulted.
If the cost of a credit check is 5% of the value of the loan and the bank is risk neutral, should the bank go ahead with the new policy?
A company is issuing preferred stock that will pay a 4% dividend but will not pay the first dividend until 6 years from now. If the required return is 10%, what is the value of the stock today? Assume a par value of $100.
What action may be taken to protect the public from the potential dangers of the skateboard?
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $575,000 p..
An investment has a required return of 13 percent. The cash flows, in order, are -$42,000 (initial cost), $16,500 (year 1 CF), $28,400 (year 2 CF) and $7,500 (year 3 CF). Based on IRR, should this project be accepted? Why or why not?
East Coast Television is considering a project with an initial outlay of $X. It is expected that the project will produce a positive cash flow of $58,000 a year at the end of each year for the next 13 years. The appropriate discount rate for this pro..
A share of stock with a beta of .66 now sells for $48. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 5%, and the market risk premium is 8%. Suppose investors believe the stock will sell for $50 at year-end. Is the st..
The data in Figure suggest an unemployment coefficient of approximately -1.0 in the Phillips curve; - What is inflation in 2023.
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.87 percent per quarter on any funds actually borrowed. Maintain a 1 percent compensating balance on any funds actually borrowed. what is t..
A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,250. Because you must repay a total of $29,250 in one year, the finance company requires you to pay $29,250/1..
A US investor has $10 million to invest in interest-bearing securities for one year. He can invest in US dollars at 2 ¾ % p.a. or in pounds sterling at 4 ½ % p.a. The current spot rate (American terms) is 1.8172 dollars per pound. At what spot rate o..
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with nine years to maturity that is quoted at 115 percent of face value. What is ICU’s pretax cost of debt? If the tax rate is 30 percent, what is the af..
A semi annual coupon bond with face value of $1000 has a coupon rate of 8% and matures in 12 years. The market-determined discount rate on this bond is 9%. What is the price of the bond? Round to the penny. What is the coupon rate of a bond with a fa..
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