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You have received an offer to buy a lease for 1 week's worth of production (100 ounces) in a particular gold mine. This lease will occur in exactly 18 months.
It is an old mine, so it costs $400/ounce to extract gold. Gold is trading for $365/ounce today but has a volatility of 40% per annum. The prevailing interest rate is 10% per year. What is the value of the gold mine?
Liquidity Premium Hypothesis One-year Treasury bills currently earn 5.85 percent. You expect that one year from now, one-year Treasury bill rates will increase to 6.10 percent. The liquidity premium on two-year securities is .110 percent. If the liqu..
Assume that interest rate parity holds and that 90-day risk-free securities yield 4% in the United States and 4.5% in Germany. In the spot market, 1 euro equals $1.30 dollar. Is the 90-day forward rate trading at a premium or discount relative to the..
What is the price of a perpetual bond with a par value of $1,000.00 and a coupon rate of 7.25% (semi annual coupon)? The bond has a nominal yield to maturity of 6.90%.
Consider the following legal actions and indicate whether civil or criminal proceedings would result: (a) Ann decides to divorce her husband, Barry, after 10 years of marriage;
The spot price of a stock is $50 and the futures contract is on 100 shares. What is the price of a 9-month American put on this futures contract if the strike is $5300? The monthly volatility of the futures price is 9%. The risk free rate is 8% per a..
You plan to take out a 30-year fixed rate mortgage for $100,000. Let P(r) be your monthly payment if the interest rate is f% per year, compounded monthly. Interpret the equations (a) P(3) = 421.60 and (b) P'(3) = 53.93.
If the central bank uses unsterilized intervention to defend the fixed rate, will intervention tend to reduce the expansionary effect of the fiscal policy?
An investor bought a racehorse for $1 million. The horse's average winnings were $700,000 per year and expenses averaged $200,000 per year. The horse was retired after 3 years, at which time it was sold to a breeder for $175,000. Assuming MACRS depre..
Sims Corp. will buy back 900 of its 2500 shares outstanding. The return on equity before the buy-back is 14%. The debt-to-equity ratio before the buy-back is 1. Also, the company plans to keep a constant debt level, with an interest rate of 3%. Assum..
Describe the methodology for designing tests using the audit risk model. What tests would you utilize to reduce risk in the sales and collection cycle?
You are the manager of Acme Fireworks, a fireworks retailer who sells fireworks, puts on ground display fireworks, and large aerial display fireworks. The company started in the owner’s garage two years ago and now has 15 employees that you manage. D..
Consider a firm with a debt-equity ratio of 0.40. The required rate of return on this firm’s unlevered equity is 18% and the pre-tax cost of debt is 8%. Sales, which totalled $34 million last year, are projected to remain at that level for the forese..
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