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Bond Stripping
Suppose there are no government zero-coupon bonds. If investors demand default-free zeros, outline the process that would create these zeros using government coupon paying bonds. Illustrate the method with a case of a four-year, 5 percent government zero.
What is the discount yield, bond equivalent yield, and effective annual return on a $1 million T-bill that currently sells at 96 3/8 percent of its face value and is 60 days from maturity?
Some major companies live and die by EVA. For example, at General Electric, more capital is allotted only to divisions that pass the EVA threshold and divisions that regularly flunk are sold off. It’s a simple, but powerful, approach that looks at a ..
AA Industries's stock has a beta of 1.7. The risk-free rate is 5%, and the expected return on the market is 11%. What is the required rate of return on AA's stock?
Assume that you are presently 30 years old and that you intend to retire when you turn 65. You would like to make sure that you have enough funds at the point of retirement to last until you are 95. You estimate that it would take $72,000 per year, i..
As the newly appointed Director of Finance at the GeKay Company, Chris Doyle is about to analyze a proposal that the firm has been considering for developing guano as a garden fertilizer – the “guano project”.
Your program has a research and development project scheduled to start in January 2017 which is expected to take 40 months to complete. The project is expected to cost a total of $150 million (then-year dollars), with cost expected to be incurred as ..
Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 28 percent for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent and the company just paid a divi..
An automobile manufacturer is converting an assembly line from standard vehicles to hybrid vehicle production. Conversion will cost $100 million. If the interest rate is 15%, how many years will it take until the present worth of the net benefits equ..
You are a new, but highly educated financial planner and need to prepare some financial statements and answer some questions for your clients, Robert and Cora Crawley, the Earl and Countess of Grantham. Create a year-end net worth statement and annua..
A firm has a net income before interest and taxes of $193,000 and interest expense of $28,000. What is the times-interest-earned ratio? And if the firm's lease payments are $48,500, what is the fixed charge coverage?
Estes Park Corp. pays a constant $8.15 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share pr..
Garcia’s Truckin’ Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. What is the initial outlay associated with..
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