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Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?
On January 8, 2016, a bank wants to lock in the 3-month interest rate starting on June 20, 2017. Currently, 6/2017 Eurodollar futures price is 94.93 and 9/2017 Eudollar futures price is 97.55. What is the interest rate that the bank can lock in? (Mar..
Firms HL and LL are identical except for their leverage ratios and the interest rates they pay on debt. Each has $30 million in invested capital, has $9 million of EBIT, and is in the 40% federal-plus-state tax bracket. Calculate the return on invest..
Nico bought 100 shares of Cisco Systems stock for $24.00 per share on January 1, 2002. He received a dividend of $2.00 per share at the end of 2002 and $3.00 per share at the end of 2003. At the end of 2004, Nico collected a dividend of $4.00 per sha..
Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $450,000 is estimated to result in $180,000 in annual pretax cost savings
A firm will sell an asset for $75,000 in three years and the cost of producing the asset today is $36,000. If the interest rate is 12 % per year, will the firm make a profit? What is the breakeven interest rate?
Given that higher risk investments, such as small-company stocks, have outperformed other investments over time, why don't all investors choose to invest only in these high risk securities? Explain why the reward-to-risk ratio must be equal for all s..
The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): CAPM method, DCF method, and Bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any..
Discuss systematic and unsystematic risk, which can be diversified and why? Also discuss some measures of systematic risk and how they can be used to maximize returns and minimize risk.
Thornley Machines is considering a 3-year project with an initial cost of $690,000. The project will not directly produce any sales but will reduce operating costs by $405,000 a year. The project will require $17,000 in extra inventory for spare part..
ABC Company considers Projects A and B, whose cash flows and the required rate of return (WACC) are shown below. These projects are mutually exclusive and equally risky. The CEO wants to use the IRR criterion, while the CFO recommends the NPV method...
Cellular International zero coupon bonds (par value $1,000) mature on April 21, 2020. Calculate the yield-to-maturity if an investor purchased one of these bonds on April 21, 2014, at a price of $650.
A saver will lend her money to someone else if she she gets a return of 4% per year for not having use of her funds. She also thinks that prices will increase by 2% per year during the time of the loan. 6% is the approximate nominal rate of interest ..
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