How To Determine Quoted Interest Rates, Nominal Interest Rates, Risk Pre...

## Monday, 4 May 2020

## Sunday, 3 May 2020

### Major Market Instruments With Their Characteristics and Market Participants

Major Market Instruments With Their Characteristics and Market Participants

## Monday, 24 February 2020

### Shamrock Inc. owns and operates a number of hardware stores in the New England region

Shamrock Inc. owns and operates a number of hardware stores in the New England region. Recently, the company has decided to locate another store in a rapidly growing area of Maryland. The company is trying to decide whether to purchase or lease the building and related facilities.

Purchase: The company can purchase the site, construct the building, and purchase all store fixtures. The cost would be $1,864,400. An immediate down payment of $417,200 is required, and the remaining $1,447,200 would be paid off over 5 years at $368,500 per year (including interest payments made at end of year). The property is expected to have a useful life of 12 years, and then it will be sold for $503,100. As the owner of the property, the company will have the following out-of-pocket expenses each period. Property taxes (to be paid at the end of each year) $41,030 Insurance (to be paid at the beginning of each year) 27,460 Other (primarily maintenance which occurs at the end of each year) 17,540 $86,030

Lease: First National Bank has agreed to purchase the site, construct the building, and install the appropriate fixtures for Shamrock Inc. if Shamrock will lease the completed facility for 12 years. The annual costs for the lease would be $258,050. Shamrock would have no responsibility related to the facility over the 12 years. The terms of the lease are that Shamrock would be required to make 12 annual payments (the first payment to be made at the time the store opens and then each following year). In addition, a deposit of $98,900 is required when the store is opened. This deposit will be returned at the end of the 12th year, assuming no unusual damage to the building structure or fixtures.

Compute the present value of lease vs purchase. (Currently, the cost of funds for Shamrock Inc. is 10%.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Lease Present value $_________ Purchase Present value$________

Which of the two approaches should Shamrock Inc. follow?

Shamrock Inc. should________ the facilities

### You are the financial analyst for a tennis racket manufacturer. The company is considering

You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphitelike material in its tennis rackets. The company has estimated the information in the following table about the market for a racket with the new material. The company expects to sell the racket for six years. The equipment required for the project has no salvage value and will be depreciated on a straight-line basis. The required return for projects of this type is 13 percent, and the company has a 40 percent tax rate.

Pessimistic | Expected | Optimistic | |||||||||||

Market size | 108,000 | 123,000 | 148,000 | ||||||||||

Market share | 20 | % | 23 | % | 25 | % | |||||||

Selling price | $ | 153 | $ | 158 | $ | 164 | |||||||

Variable costs per unit | $ | 107 | $ | 102 | $ | 101 | |||||||

Fixed costs per year | $ | 968,000 | $ | 923,000 | $ | 893,000 | |||||||

Initial investment | $ | 1,920,000 | $ | 1,818,000 | $ | 1,716,000 | |||||||

Calculate the NPV for each case for this project. Assume a negative taxable income generates a tax credit. |

### A multinational engineering consulting firm that wants to provide resort accommodations to

A multinational engineering consulting firm that wants to provide resort accommodations to special clients is considering the purchase of a three-bedroom lodge in upper Montana that will cost $265,000. The property in that area is rapidly appreciating in value because people anxious to get away from urban developments are bidding up the prices. If the company spends an average of $625 per month for utilities and the investment increases at a rate of 0.75% per month, how long would it be before the company could sell the property for $100,000 more than it has invested in it?

The time it will take is________ months.

### Firm A has a market value of $318,000 while Firm B's market value is $69,000. Firm A just

Firm A has a market value of $318,000 while Firm B's market value is $69,000. Firm A just acquired Firm B for $75,000 cash. What is the net present value of the acquisition if the merger creates $15,500 of synergy?

Multiple Choice

A. $7,000

B. −$6,000

C. $4,500

D. −$13,000

$9,500

### Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 22 percent for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required return is 12 percent, and the company just paid a dividend of $3.25, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) PLEASE SHOW HOW TO SOLVE USING A CALCULATOR. USING THE CF AND NPV FUNCTIONS.

### Ben Bates graduated from college six years ago with a finance undergraduate degree

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he has narrowed his choice to either Wilton University or Mount Perry College. Although internships are encouraged by both schools, to get class credit for the internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Ben currently works at the money management firm of Dewey and Louis. His annual salary at the firm is $65,000 per year, and his salary is expected to increase at 3 percent per year until retirement. He is currently 28 years old and expects to work for 40 more years. His current job includes a fully paid health insurance plan, and his current average tax rate is 26 percent. Ben has a savings account with enough money to cover the entire cost of his MBA program. The Ritter College of Business at Wilton University is one of the top MBA programs in the country. The MBA degree requires two years of full-time enrollment at the university. The annual tuition is $70,000, payable at the beginning of each school year. Books and other supplies are estimated to cost $3,000 per year. Ben expects that after graduation from Wilton, he will receive a job offer for about $110,000 per year, with a $20,000 signing bonus. The salary at this job will increase at 4 percent per year. Because of the higher salary, his average income tax rate will increase to 31 percent. The Bradley School of Business at Mount Perry College began its MBA program 16 years ago. The Bradley School is smaller and less well known than the Ritter College. Bradley offers an accelerated, one-year program, with a tuition cost of $85,000 to be paid upon matriculation. Books and other supplies for the program are expected to cost $4,500. Ben thinks that he will receive an offer of $92,000 per year upon graduation, with an $18,000 signing bonus. The salary at this job will increase at 3.5 percent per year. His average tax rate at this level of income will be 29 percent. Both schools offer a health insurance plan that will cost $3,000 per year, payable at the beginning of the year. Ben also estimates that room and board expenses will cost $2,000 more per year at both schools than his current expenses, payable at the beginning of each year. The appropriate discount rate is 6.3 percent.

1. How does Ben’s age affect his decision to get an MBA?

2. What other, perhaps nonquantifiable factors affect Ben’s decision to get an MBA?

3. Assuming all salaries are paid at the end of each year, what is the best option for Ben—from a strictly financial standpoint?

4. Ben believes that the appropriate analysis is to calculate the future value of each option. How would you evaluate this statement?

5. What initial salary would Ben need to receive to make him indifferent between attending Wilton University and staying in his current position?

6. Suppose, instead of being able to pay cash for his MBA, Ben must borrow the money. The current borrowing rate is 5.4 percent. How would this affect his decision?

### One-year Treasury bills currently earn 2.50 percent. You expect that one year from now

One-year Treasury bills currently earn 2.50 percent. You expect that one year from now, 1-year Treasury bill rates will increase to 2.70 percent and that two years from now, 1-year Treasury bill rates will increase to 3.20 percent. The liquidity premium on 2-year securities is 0.05 percent and on 3-year securities is 0.15 percent. If the liquidity premium theory is correct, what should the current rate be on 3-year Treasury securities? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

### What is the present value of a $1,200 payment made every year forever when interest rates

What is the present value of a $1,200 payment made every year forever when interest rates are 4.5 percent?

A loan is offered with monthly payments and a 15.5 percent APR. What is the loan's effective annual rate (EAR)?

Subscribe to:
Posts (Atom)