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Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $229.4 million or lease it for $25.0 million per year. If it purchases the airplane, its seating can be optimized, and the new route is expected to generate profits of $50.6 million per year. If leased, the route will only generate profits of $33.6 million per year. Suppose the appropriate cost of capital is 12.6% and that, if purchased, the plane can be sold at any time for an expected resale price of $229.4 million. Ignore taxes. a. As a one-year decision, does purchasing or leasing the plane have higher NPV? b. Suppose the funds to purchase or lease the plane will come from equity holders (for example, by reducing the amount of Western's current dividend). Western also has one-year debt outstanding, and there is a 10.6% (risk-neutral) probability that over the next year Western will declare bankruptcy and its equity holders will be wiped out. Otherwise, the debt will be rolled over at the end of the year. Is purchasing or leasing the plane more attractive to equity holders? c. At what (risk-neutral) probability of default would equity holders' preference for leasing versus purchasing the plane change?
A firm has total debt of $1,410 and a debt-equity ratio of .33. - What is the value of the total assets?
On the other hand, Nguyen and Tang (2009) find that- The 2008 short-sale ban has a ________ (positive or negative or no) impact on the stock prices of the banned stocks in the ban period.
An open-market dividend reinvestment plan will be most attractive to companies that need new equity and would be looking to issue additional shares of common stock. Stock repurchases tend to increase financial leverage. A firm has Net Income of $500,..
A construction company believes its revenues are inversely correlated with interest rates.
Suppose a bank is faced with two types of borrowers - a high risk borrower that should be charged an interest rate of 9% and a low risk borrower that should be charged an interest rate of 4%. What is the expected interest rate that will be charged by..
end of each quarter in an account that earns interest at a rate of 5%, compounded quarterly?
The current yield on a par value bond will exceed the bond's yeild to maturity. The yield to maturity on a premium bond exceeds the bond's coupon rate. The current yield on a premium bond is equal to the bond's coupon rate
A bond with a coupon rate of 8% makes semiannual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100:08. What is the invoice price of the bond? The coupon period has ..
A stock has an expected return of 11.3 percent, its beta is .88, and the risk-free rate is 5.65 percent. What must the expected return on the market be?
Lakeside Winery is considering expanding its wine-making operations. The new equipment would cost $138,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero value at the end of the 5th year.
The purchasing manager for a large company agrees to give you an order (their first), expecting you agree to make a $200 donation to his favorite charity, a local youth sports team. How do you respond?
BA Corp is issuing a 10-year bond with a coupon rate of 9.94 percent. The interest rate for similar bonds is currently 5.57 percent. Assuming annual payments, what is the value of the bond?
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