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

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

Major Market Instruments With Their Characteristics and Market Participants

Major Market Instruments With Their Characteristics and Market Participants

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)?

A company has just paid a dividend of $ 3 per share, D0=$ 3 . It is estimated that the

A company has just paid a dividend of $ 3 per share, D0=$ 3 . It is estimated that the company's dividend will grow at a rate of 18 % percent per year for the next 2 years, then the dividend will grow at a constant rate of 7 % thereafter. The company's stock has a beta equal to 1.4, the risk-free rate is 4.5 percent, and the market risk premium is 4 percent. What is your estimate of the stock's current price? Round your answer to two decimal places.

Boehm Incorporated is expected to pay a $ 1.2 per share dividend at the end of the year

Boehm Incorporated is expected to pay a $ 1.2 per share dividend at the end of the year (i.e.,D1). The dividend is expected to grow at a constant rate of 3 % a year. The required rate of return on the stock, r, is 13 %. What is the value per share of the company's stock? Round your answer to two decimal places.

Myers Business Systems is evaluating the introduction of a new product. The possible

Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given next:

Possible Market Reaction	Sales in Units			Probabilities
Low response		20			0.30
Moderate response		35			0.20
High response		45			0.20
Very high response		60			0.30

a. What is the expected value of unit sales for the new product? (Do not round intermediate calculations and round your answer to the nearest whole unit.)

b. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Joey realizes that he has charged too much on his credit card and has racked up $5,000 in

Joey realizes that he has charged too much on his credit card and has racked up $5,000 in debt. If he can pay $150 each month and the card charges 18 percent APR (compounded monthly), how long will it take him to pay off the debt?

Several years ago, Berkshire, Warren & Co., LLC, an investment banking firm, purchased

Several years ago, Berkshire, Warren & Co., LLC, an investment banking firm, purchased 1,000,000 shares of Outron Corporation preferred stock directly from the corporation for $100,000,000.   Berkshire paid for the stock by giving Outron a promissory note for $100,000,000 due in 20 years, with interest payable annually at 2 percent, which was then the prevailing market rate. Recently, Outron decided that it needed to increase its current cash flow and offered Berkshire a reduction of the principal amount of the promissory note to $80,000,000 if Berkshire would agree to increase the interest rate to the current market rate of 10%. Berkshire found the offer advantageous and accepted it. How much COD income does Berkshire realize? Are there any further tax consequences?

Payday loans are very short-term loans that charge very high interest rates. You can borrow

Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $225 in two weeks. What is the compound annual rate implied by this 12.5 percent rate charged for only two weeks?

Wigmore, Inc., has estimated sales of $17,400, $19,200, $18,840, and $19,100 for each

Wigmore, Inc., has estimated sales of $17,400, $19,200, $18,840, and $19,100 for each quarter next year, respectively. The accounts receivable period is 80 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.

You are provided the following amount about Cradle Inc

You are provided the following amount about Cradle Inc.

	2017	2018	2019
Sales	56,248	58,162	65,187
Cost of goods sold	35,047	36,205	42,372
Gross margin	21,201	21,957	22,815
Operating expenses	4,287	4,446	4,677
Depreciation	6,111	6,047	6,216
Net income before tax	10,803	11,464	11,922
Income tax	2,377	2,522	2,377
Net income	8,426	8,942	9,545
Cash	974	3,001	3,329
Accounts receivable	9,531	9,855	11,770
Inventory	7,886	8,046	10,004
Fixed assets, net	45,169	42,148	45,169
Line of credit	9,000	-	10,000
Accounts payable	4,381	4,526	5,296
Current portion of long term debt	3,862	3,247	4,124
Long term debt, net of current portion	31,149	35,167	26,197
Common stock	3,000	3,000	3,000
Retained earnings	12,168	17,110	21,655
Line of credit maximum	25,000	25,000	60,000

Does Cradle have liquidity issues?

In order to answer this question you should perform a cash inflow / outflow analysis and examine key liquidity ratios and interpret the results.