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There are two otherwise identical companies but U is unleveraged and L is leveraged. During a boom both companies make a profit of $250 and $100 when the market is down. The probability of a boom is 60%. The market worth of U is $1500. The risk free debt of L is $700 and with 6% interest on loan the loan expenses are $42. The markets are perfect with no taxes and transaction costs. Investors can borrow and deposit with the risk free interest rate.
a.) What is the market value of L?b.) You invest $60 into stocks of U. Is there an optional investment that can be made into L (combined with a deposit or loan) that provides you exactly the same profits both when the market is up and when it is down? What are the expected profits?c.) The other way around: you invest $60 into stocks of L. By combining a stock purchase of U and deposit/loan, provide a optional strategy that provides the same profits.d.) By using the information in this exercise, prove that MM2 holds.
Share A has an expected return of 15% and standard deviation of 14 percent. Share B has an expected return of 23 percentand a standard deviation of 18 percent. Correlation between Share A & B is 0.3
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 8.4%. What is the maturity risk premium for the 2-year security?
A bank has $ 10 million in vault cash and $ 110 million in deposits. If total bank reserves were $ 15 million with $ 2 million considered to be excess reserves, what requires reserves ratio is implied?
What advantages might a socialist system have in responding to the needs of people struck by an emergency situation like the earthquake that occurred in Haiti in January.
Report the recent conditions of consumer spending, labor markets, wages and prices, and industrial activity. What is the most recent monetary policy action taken by the FOMC?
In a loan modification scenario, determine under what circumstances would a debtor record a gain? Estimate its key difference in the way the creditor calculates its loss from the way the debtor calculates its gain?
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2007. The WACC is 11 percent.
What are the relevant cash flows given the above information?
she has decided to save $1,000 a quarter for the next four years in a bank account paying 12 percent interest (compounded quarterly). How much will she have at the end of fourth year? (Round to the nearest whole dollar)
The spectrometer would have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.
Additionally, when you retire you will transfer your money to an account that earns 6.25 percent.
Also assume that CAPM holds and that the risk-free rate is 4% and the market risk premium is 8%. Suppose Starbucks' weighted average cost of capital is 10.6%. What is the required return on Starbucks' debt?
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