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1. The risk-free rate is 4%. The expected rate of return on the stock market is 12%. What is the appropriate cost of capital for a project that has a beta of -3? Does this make economic sense?
2. The risk-free rate is 4%. The expected rate of return on the stock market is 7%. A corporation intends to issue publicly traded bonds that promise a rate of return of 6% and offer an expected rate of return of 5%. What is the implicit beta of the bonds?
Suppose a risk-free security pays a 8% return, and a market portfolio has an expected return of 9%. What is the expected return on a portfolio that has $6,000.00 invested in the risk-free security and $4,000.00 invested in the market portfolio? What ..
Five years ago, John purchased a 7% coupon (paid annually), 20-year maturity. $1000 fac value corporate bond for $900. He reinvested the coupons at 5% per year, and just sold off the bond at its prevailing yield to maturity of 10%. Will John have ear..
Suppose Mr. Thomas, president of your company, has hired you to determine the firm's cost of debt and the cost of equity capital. Based on his analysis, Mr. Thomas is recommending that the company increase its use of equity financing because "debt co..
Assume that the current spot rate is $1.0850/€ and the 3-month forward rate is $1.1100/€. Do all calculations for this problem for a three-month period, and you do not have to annualize. Does the foreign exchange market expect the Euro to appreciate ..
The underlying goal of commercial bank management is to maximize the wealth of the bank’s shareholders, which implies maximizing the price of the bank’s stock (if the bank is publicly traded). A bank’s board of directors needs to monitor bank manager..
Most of us intuitively understand that a dollar required today does not have the same value as a dollar needed (or utilized) in the future. This is due to several factors including interest rates, compounding factors, discounting factors and financia..
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $430,000 in debt. Plan II would result in 12,600 shares of stock and $275,200 in debt. What is the price per share of equity under Plan I? What ..
A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g =-5%). The constant growth model cannot be used because the growth rate is negative. The company's expect..
Here are the budgets of Brandon Surgery Center for the most recent historical quarter (in thousands of dollars): Explain how each amount in the flexible budget was calculated. What do the Part B results tell Brandon’s managers about the surgery cente..
Beginning three months from now, you want to be able to withdraw $3,100 each quarter from your bank account to cover college expenses over the next four years. If the account pays .53 percent interest per quarter, how much do you need to have in your..
A bank offers a $100 certificate which redeems a variable amount after 5 years calculated as follows: $108and: $+1.08 for every percent that XYZ index went up, or: -$1.08 for every percent that XYZ index went down. draw the redemption amount of the c..
A firm offers terms of 2/10 net 40. What effective annual interest rate does the firm earn when a customer does not take the discount?
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