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Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which dividends of $5 a share are distributed. Commissions are 2 percent of the value of a purchase or sale; the margin requirement is 60 percent, and the interest rate is 10 percent annually on borrowed funds. What is the percentage earned by each investor if he or she sells the stock after one year for (a) $40, (b) $55, (c) $60, and (d) $70? If the margin requirement had been 40 percent, what would have been the annual percentage returns? What conclusion do these percentage returns imply?
Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased an iPad for $350. The minimum payment on the card is only $10 per month. How much interest in total does he pay on his credit card debt?
Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 −$16,600 −$16,600 1 6,640 7,150 2 7,220 7,800 3 4,740 3,490 Requirement 1: (a) What is the IRR of Project X? What is the crossover rate for these two projects?
What is the difference between a serial LLC sponsored captive arrangement and the traditional captive insurance arrangement?
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $17,500 per year forever. If the required return on this investment is 5.7 percent, how much will you pay for the policy? Suppose the Perpetu..
Eric works for a company with a defined contribution benefit pension plan. He will retire in ten years (at age 65) and expects his salary to be $100,000 in his last year of work. Social security should pay him $1,325 per month at that time. If he nee..
The Electrical Engineering Company is considering a new project that will require an initial cash investment of $612,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $84,000, $1..
Which one of the following statements related to stock buybacks is correct? Stock buybacks are a means of obtaining shares for employee stock option grants. Stock buybacks are becoming rare and may soon disappear totally. In 2007 and 2008, U.S. comp..
What gives rise to the currency exposure at AIFS and what would happen if Archer-Lock and Tabaczynski did not hedge at all?
Why do you think Peter F. James (newly appointed controller) was the first to discover the fraud? Why didn't other accountant who worked for the firm detect the fraud earlier?
Company A is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $219,000, a 4-year expected life, and after-tax cash flows (labour savings and depreciation) of ..
You are celebrating your 35th birthday today and you want to start saving for your retirement at age 65. You want to be able to withdraw $15000 per year on each birthday for 12 years following your retirement; the first withdrawal will be on your 66t..
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the pr..
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