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Suppose that the current price of eBay is $40 per share. Suppose further that the share price of eBay one month from now depends on the state of the economy as follows:
State of Economy Probability Price
Boom .2 $52
Normal .5 $44
Recession .3 $30
Also note that eBay will not pay any dividends over the next month.
1. You buy 500 shares, using $10,000 of your own money and borrowing the remainder of the purchase price from your broker. The interest rate on the margin loan is 2% per month, and the maintenance margin is 30%. What is the expected return of your investment?
2. What is the probability that you will receive a margin call from your broker one month from now? Explain with quantitative justification.
3. Suppose you sold short 500 shares of eBay at $40, using the maximum leverage allowed, and the price went up to $52 after one month. If you close out your short position, what would be the rate of return on your investment? (Ignoring transaction costs).
Assume that a department store, specializing in the sale of opuses solely depicting Domus Italica, has 6years remaining on its lease in a mall. Rent is $2,500 per month, 72payments remain, and the next payment is due in a month. The mall’s owners, An..
Find problems inherent in Simpsons WACC calculation and what can you suggest to solve problems found - Simpson used the CAPM to estimate the cost of common stock.
A friend wants to work for 2 years then return to school full time for a master’s degree. OPTION A: He can invest $1,000/month in a mutual fund that earns 6% annually, for 2 years. But he is thinking of waiting five years, and investing only $500/mon..
A $1,000 bond is issued paying 8% interest semi-annually for 15 years while the market is paying 7% for similar bond issues. What price would investors expect to pay for the bond?
The financial staff od Carin Communications has identified the fallowing information for the first year of the roll-out of its new proposed services: The company faces a 40% tax rate. What is the project’s operation cash flow for the first year (t=1)..
Calculate the PV of a 20-year California lottery pot paying $50,000 annually at the discount rate of 10%. Is it $1 million, why or why not? Calculate the price of a three-year treasury bond/note paying 5% coupon on $1,000 face value at the discount r..
Mooradian Corporation's free cash flow during the just ended year (t=0) was $180 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5 % what is the firm’s total corporate ..
Agency law plays a big part in corporate responsibility (and liability). Differentiate between an employee and an independent contractor. What is the difference and what are the key factors that must be considered in determining one’s status as an em..
Kennebunk Manufacturing is expected to pay a dividend of $8 per share next year. The dividend growth rate is expected to continue to be 3%. Required rate of return is 7%. What should be the current market price per share?
Suppose that the Brazilian real depreciates by 40% against the US.dollar. By how much will the dollar appreciates against the real?
Describe in detail the differences and similarities in calculating the present value and future value of a lump sum, annuity, perpetuity and A series of unequal (multiple) cash flows.
If the discount rate is 8 percent, what is the future value of the cash flows in year 4? If the discount rate is 11 percent, what is the future value of the cash flows in year 4?
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