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Suppose that a futures margin account pays interest but at a rate that is less than the risk-free rate.
Consider a trader who buys the asset and sells a futures to form a risk-free hedge. Would the trader believe the futures price should be lower or higher than if the margin account paid interest at the risk-free rate?
Bradbury Breathe Easy Corporation just announced that its net income was lower than last year. Nevertheless, analysts estimate that the company’s net cash flow increased. What factors could explain this inconsistency?
BJK has debt outstanding with the face value of $200 million. The value of the firm if it were entirely financed by equity would be $350 million. Number of shares outstanding is 5 million. The stock is currently selling at $32. The corporate tax rate..
A hypothetical stock is expected to pay a dividend of $12 per share in two months, in six months and in ten months. The stock price is $600, and the risk-free rate of interest is 0.55% per annum with continuous compounding for all maturities.
A pension fund has an average duration of its liabilities equal to 14 years. The fund is looking at 6-year maturity zero-coupon bonds and 5% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the ze..
Bluff Enterprises has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 6 years, and have a 7percent coupon. The current price is quoted at 101.36. What is the yield to maturity?
Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant? Cheng Inc. is consider..
There has been a major global crisis, and your company’s board of directors has announced that the company is going bankrupt. No one could have seen this one coming. As your company’s controller, compose a summary report to your CEO advising him on t..
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..
Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. What is the initial investment in the product? Remember working capital. If the plant and equipment are de..
You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $69,000, has a 5-year life, and has an annual OCF (after tax) of –$11,100 per year. The Keebler CookieMunster costs $95,500, has a 7-year life, and has an annual OCF (after..
The cost of preferred stock, rp, used in the weighted average cost of capital equation is calculated as the preferred dividend, Dp, divided by the current price of the preferred stock, Pp. ,tax adjustment is made when calculating rp because preferred..
BUYING STOCK WITH COMMISSION-At your discount brokerage firm, it costs $10.40 per stock trade. How much money do you need to buy 500 shares of Ralph Lauren (RL), which trades at $85.22?
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